Question

5. Consider the following project data: A Shs 2 million feasibility study will be conducted at t =0. If the study indicates potential, the firm will spend Shs 10 million at t= 1 to build a prototype. The best estimate is that there is an 80% chance that the study will indicate potential and 20% chance that it will not. If reception of the prototype is good the firm will spend Sh. 350 million to build a production plant at t=2. The best estimate is that there is a 70% chance that the prototypes’ reception will be poor. If the plant is built, there’s a 60% chance of a t=3 cash inflow of Shs 300 million and a 40% chance of Shs 150 million cash inflow. If the inflow at t=3 is Shs 300 million, there are 30% and 70% chances of Shs 160 million and Shs 90 million inflows respectively at t=4. If the inflow at t=3 is Shs 150 million, there are 80% and 20% chances of Shs 210 million and Shs 140 million inflows respectively at t=4. The plant has a salvage value of Shs 50 million at t=5. If the appropriate cost of capital is 15% what is the project’s expected NPV?

Answer 1

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