Assume the following regarding a project. A project has a capital investment of $15M...
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Assume the following regarding a project. A project has a capital investment of $15M in year zero. Operating cost, sales revenue and associated probabilities as shown below. Project year 1 2 3 4 5 (a) Operating cost ($M) if: (i) Demand is weak 5 5 5 5 5 (ii) Demand is avg. 6 6 6 6 6 (iii)Demand id good 12 12 12 12 12 (b) Sales revenue ($M) if: (i) Demand is weak 8 8 8 8 8 (ii) Demand is avg. 10 10 10 10 10 (iii)Demand id good 20 20 20 20 20 The probabilities associated with demand are as follows: Demand Probability (i) Demand is weak - 0.25 (ii) Demand is avg. - 0.45 (iii) Demand id good - 0.30 The residual value of fixed assets is $5M. The cost of equity is 20% and loan can be obtained at 10%. The leverage factor is 60%. Inflation rate is projected to be 6% over the appraisal life of the project.
(a) Compute the real discount rate. (3 marks) (b) Calculate the Expected NPV for the project. (15 marks) (c) Compute the Std. Dev. of the NPV and interpret the result. (20 marks) (d) Compute the CV and interpret the result. (2 marks)
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