someone solve this finance question!

[xxweekxx]

No its not homework, its a practice in book for exam:

Investment timing option: Digital Inc. is considering production of a new cell phone. The project would require an investment of $20 million. If the phone were well received, then the project would produce cash flows of $10 million a year for 3 years, but if the market did not like the product, then the cash flows would be only $5 million per year. There is a 50% probability of both good and bad market conditions. Digital could delay the project for a year while it conducts a test to determine if demand would be strong or weak. The delay would not affect either the project?s cost or it cash flows. Digital?s WACC is 10%. Use the table below to determine the Expected NPVs, standard deviations and coefficient of variations, as well of the value of the investment timing option. What action would you recommend?

Values i need:

Scenario: Invest Immediately
Condition Probability 2007 2008 2009 2010 NPV

Expected NPV
Standard Deviation
Coefficient of Variation


Scenario: Wait a year
Condition Probability 2007 2008 2009 2010 NPV

Expected NPV
Standard Deviation
Coefficient of Variation

(I need cash flows for the years for the periods)

[who]

And the guy who answers it, please write my thesis for me.

[xxweekxx]

hehe im doing pratice questions in the book.. i think i got this right but im not sure..

[xxweekxx]

hehe fuck you too bitch.. if you dont wanna answer it go shoot yourself nobody asked u fucker

[Dvae]

Answer: The Iphone has already been invented therefore its more than a 50% probability that it will fail miserably.

[The Heron]

I hated those problems, I'd just copy from the smart geek in class and end up hiring him to do my bitch work after graduation.

[D]

the answer is seven.*

















*the provided answer is most likely incorrect.

[xmas13]

[The Duck]

The answer is 42.

[Iron Fist]

The answer is no answer.

[sniperwolf]

Though I've taken and passed my economic statistics and econometrics class, I cannot answer the above problem just now. but give me a day and might do something about it!

[Persius]

I'm trying to solve it right now... this is a CFA question no?

[Odie]

gimme a few minutes...

[Odie]

no one's got an answer?? I got one but I wanna see what other will come up with...

[Odie]

The following solution assumes the following assumptions:

1) In either Scenario 1 or 2, the initial investment of $20 million is made at the start of investment year; therefore, in Scenario 1, the investment is made at t=0; where as in Scenario 2, the investment is made at the start of t=0+1, or t=1.

2) The cash inflows under both scenarios begin in the year following the initial investment. Further, it is assumed that these cash flows are linear in nature and occur evenly throughout the year (as opposed to at the end of the year which is not a reasonable assumption for earnings). This is relevant b/c the appropriate discount in the period of the cash flow must be to the power 1/2, and not 1 as 1 assumes cash flow occurs at the end of the period.

In the case of Scenario 1, the investment is made at t=0 in Year 1 and the first cash flows occur during year 2 and occur evenly throughout the year.

3) There is no terminal value to the cash flows, that is, cash flows cease in the 3rd year. Further, there is no residual value attributed to the initial $20 million investment.

4) There is no opportunity cost to waiting on year, that is, there is no competing investment opportunity to consider and there is no return on the dormant capital during the year in which the market survey is completed.

Solution Calculations

Scenario 1Year 1Year 2Year 3Year 4Year 5
Invested Capital $ (20.0) $ (20.0)
Cash Flows
Well Received50% $ 10.0 $ 5.0 $ 5.0 $ 5.0
Poorly Received50% $ 5.0 $ 2.5 $ 2.5 $ 2.5
Net Cash Flows $ (20.0) $ 7.5 $ 7.5 $ 7.5

PV10% $ (20.0)$6.50 $5.91 $5.37
NPV - t=0 $ (2.2)

Scenario 2
Invested Capital $ (20.0) $ - $ (20.0)
Cash Flows
Well Received100% $ 10.0 $ - $ 10.0 $ 10.0 $ 10.0
Poorly Received0% $ 5.0 $ - - - -
Net Cash Flows $ - $ (20.0) $ 10.0 $ 10.0 $ 10.0

PV10% $ - $ (18.2) $ 7.9 $ 7.2 $ 6.5
NPV - t=0 $ 3.4
Implied IRR - t=023%

Variance6.25
Std 2.50
Mean 7.50
Coefficient of Variation0.333333


Solution Recommendation

Scenario 2 is the recommended course of action. The probably adjusted cash flows under scenario 1 results in a negative NPV, that is the project IRR is less that the required hurdle rate (WACC @ 10%).

Given that Scenario 1 is negative, the company would only proceed with the project in the case that the marketing study indicated that the new cell phone would be well received by the market and as a result the probability adjusted cash flows would be $10 million annually.

let me know if that works for you

[Odie]

soooooooo, I'm waiting...

[Odie]

nobody wants to compare answers?

[Dollarmansteve]

whats the discount rate?

[Odie]

why do people start threads and abandon them?? I wanna know if my answer is right