### Expected npv by a chance of average demand

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1) Tropical Sweets is considering a project that will cost \$70 million and will generate expected cash flows of \$30 million per year for the next three years. The cost of capital for this type of project is 10 percent and the risk free rate is 6 percent. After discussions with the marketing department, you learn that there is a 30 percent chance of high demand, with future cash flows of \$45 million per year. There is a 40 percent chance of average demand, with cash flows of \$30 million per year. If demand is low (a 30 percent chance), cash flows will be only \$15 million per year. What is the expected NPV?

Expected cash flow = (0.3 * 45) + (0.4 * 30) + (0.3 * 15) = 30 million

NPV = -70 + 30/1.1 + 30/(1.1)2 + 30/(1.1)3
NPV = -70 + 27.27 + 24.79 + 22.53
NPV = 4.59
NPV is \$ 4.59

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