Question

Xander Inc. has prepared the following sensitivity analysis:

Estimated Annual Net Cash Flow $500,000 $600,000 $700,000

Present value of annual net cash flows (× 4.487) $2,243,500 $2,692,200 $3,140,900

Present value of residual value 50,000 50,000 50,000

Total present value $2,293,500 $2,742,200 $3,190,900

Amount to be invested (3,000,000) (3,000,000) (3,000,000)

Net present value (706,500) (257,800) 190,900

In addition, it has assigned the following likelihoods to the three possible annual net cash flows: $500,000, 70%; $600,000, 20%; and $700,000, 10%. Based on an expected value analysis, which of the following statements is accurate?

a.The expected value of the annual net cash flow is $660,000, and the project should be accepted.

b.The expected value of the annual net cash flow is $540,000, and the project should be accepted.

c.The expected value of the annual net cash flow is $540,000, and the project should be rejected.

d.The expected value of the annual net cash flow is $660,000, and the project should be rejected.

Answer 1