Three estimators at Tech Engineering have come up with the estimates of cash flo

Question

Three estimators at Tech Engineering have come up with the estimates of cash flows as shown in the table below for a project with a life of 10 years. Compute the expected NPW at 20%.

Data

Estimator I

Estimator II

Estimator III

First Cost, $

5,000

8,750

7,500

Benefits /Year, $

3,750

4,000

3,000

Salvage Value

1,750

1,000

5,000

Probability is 1/3 for Estimator I, Estimator II, & Estimator III.

$15,391

$15,830

$14,033

$8,356.06

Data

Estimator I

Estimator II

Estimator III

First Cost, $

5,000

8,750

7,500

Benefits /Year, $

3,750

4,000

3,000

Salvage Value

1,750

1,000

5,000

Explanation / Answer

NPW for Estimator I = -5000 + 3750*(1-1/1.2^10)/20% + 1750/1.2^10=11004.41

NPW for Estimator II = -8750 + 4000*(1-1/1.2^10)/20% + 1000/1.2^10=8181.394

NPW for Estimator III = -7500 + 3000*(1-1/1.2^10)/20% + 5000/1.2^10=$5,884.94

expected NPW = 1/3*11004.41+ 1/3*8181.394+ 1/3*5,884.94= 8356.06

D.

$8,356.06

D.

$8,356.06

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