An Analyst Is Forecasting Net Income for Excellence Corporation for the Next

question 134

Multiple Choice

An analyst is forecasting net income for Excellence Corporation for the next fiscal year. Her low-end estimate of net income is $250,000, and her high-end estimate is $350,000. Prior research allows her to assume that net income follows a continuous uniform distribution. The probability that net income will be greater than or equal to $337,500 is ________.

• A) 12.5%
• B) 29.6%
• C) 87.5%
• D) 96.4%

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Definitions:

Risk Adjusted NPV

Net Present Value method adjusted for the risk associated with the uncertain cash flows, taking into account the variability of returns and the cost of capital.

Initial Cost

The initial expenditure required to acquire an asset, including the purchase price and any additional costs necessary to get the asset ready for its intended use.

Cash Inflows

Funds that are received, whether from business operations, investment returns, or financing activities.

Certainty Equivalent Approach

This is a method used in financial analysis to determine the value of risky investments by finding the risk-free cash flow amount that an investor would accept instead of taking a risk.