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Example One: Expected Monetary Value and Standard Deviation JLtd is a private limited company in...

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Accounting

Example One: Expected Monetary Value and Standard Deviation
JLtd is a private limited company in the electronics industry. In order to improve its operations,
the company is contemplating to purchase 8 computers at a cost of Sh.100,000 each.
Installation cost for all the computers will amount to Sh.80,000. It is estimated that once installed,
the computers will increase the company's earnings before depreciation and tax from Sh.
12,000,000 to Sh.12,500,000 annually. The computers are expected to last for 10 years after which
they will be obsolete with no resale value.
The Operations Manager proposes that the computers will be useful for 15 years with no resale
value. The Marketing Manager on the other hand argues that the company needs the computers for
only five years after which they will be disposed of at Sh.50,000 each. The probability distribution
of the useful life of the computers is given as follows.:
The company is in the 30% tax bracket and its cost of capital is 10%. It uses the straight line
method to depreciate all of its non-current assets.
Required:
(i) The expected NPV of the project
(ii) The standard deviation of the expected NPV.

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