What is the expected NPV of the new project

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Reference no: EM131055312

A firm is considering a new project that has a cost of $1,000. Suppose, the CFO asked you to set up the decision tree to show its three most likely scenarios. The best case scenario happens with probability of 0.2, and produces three cash flows of $800 at t=1,2,3. With probability of 0.6 the base case scenario produces cash flows of $520 for the next three years. With the remaining probability the worst case scenario leads to negative cash flow of -$200 at time 1, after which the firm could arrange with its work force and suppliers to cease operations at the end of Year 1. Assume that WACC is 7%.

a. What is the expected NPV of the new project?

b. Is the project risky given that the average project of that firm has a coefficient of variation of 1.7? Prove by finding CV of the project.

Reference no: EM131055312

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