Problem:
A firm is considering investing $10 million today to start a new product line. The future of the project is unclear however and depends on the state of the economy. The project will last 5 years. The yearly cash flows for the project are shown below for the different states of economy.
Required:
What is the expected NPV for the project if the cost of capital is 12%?
Note: Please explain comprehensively and give step by step solution.
| Project |
chance of |
yearly |
| Outcome |
outcome |
cash flow |
| Good |
25% |
$8.00 |
| Average |
50% |
$3.00 |
| Bad |
25% |
($2.00) |