A company wants to replace a machine with a modern, more efficient model with a longer life expectancy. The equipment requires an initial investment of $600,000 in Year 0. The expected cash flows and standard deviations are as follows:
Year Cash Flow Standard Deviation
1 $140,000 $15,000
2 $160,000 $ 50,000
3 $ 300,000 $ 100,000
4 $ 400,000 $ 120,000
The firm's WACC is 16% and the risk-free rate is 6%. The analyst develops the following CEFs.
Certainty Equivalent Factor (CEF)
Coefficient of Variation (CV) Year 1 Year 2 Year 3 Year 4
CV (less than or equal to) 0.30 .95 .92 .89 .85
CV > 0.30 .85 .82 .78 .73
What are the project's NPV and its CE(NPV)?