The staff of Porter Manufacturing has estimated the following net after-tax cash

Question

The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for a new manufacturing process: Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the estimated salvage values. Porter’s cost of capital for an average-risk project is 10%.
Net After-Tax Cash Flows Year P = 0.2   P = 0.6   P = 0.2 0   $100,000   $100,000   $100,000 1 20,000   30,000   40,000 2 20,000   30,000   40,000 3 20,000   30,000   40,000 4 20,000   30,000   40,000 5 20,000   30,000   40,000 5* 0   20,000   30,000
4. Assume that the project has average risk. Find the project’s expected NPV. (Hint: Use expected values for the net cash flow in each year.)

Explanation / Answer

Line 0 gives the cost of the process.

Line 5 gives the estimated salvage value.

Calculation of expected Cash Flows each year:

Year 0

Year 1 to 4 each

Year 5

Calculation of project's expected NPV

Cash Flows Probability Expected Cash flows -100000 0.2 -20000 -100000 0.6 -60000 -100000 0.2 -20000 Total -100000

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