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CF-Assignmnt 01

management

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ameer Hamza
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178 views

CF-Assignmnt 01

management

Uploaded by

ameer Hamza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
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Reif ection Problems 1. Naughty Pine Lumber Company is evaluating a new saw with a life of two years. The saw costs $3,000, and future after-tax cash flows depend on demand for the company’s pro- ducts. The tabular illustration of a probability tree of possible future cash flows associated with the new saw is as follows: YEAR 1 YEAR 2 INITIAL NET ‘CONDITIONAL NET PROBABILITY CASH PROBABILITY CASH Pl) FLOW P24 1) FLOW BRANCH -—— 030 $1,000 1 0.40 $1,500 ——j—— 0.40 1,500 2 L__ 030 2,000 3 -— 2,000 4 0.60 2,500 ——+—— 0.40 2,500 5 + 3,000 6 1.00 1.00 5 ... What are the joint probabilities of occurrence of the various branches? b. Ifthe risk-free rate is 10 percent, what is (i) the net present value of each of the six com- plete branches, and (ii) the expected value and standard deviation of the probability distribution of possible net present values? c. Assuming a normal distribution, what is the probability that the actual net present value will be less than zero? What is the significance of this probability?

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