You have come up with the following estimates of project cash flows:
$$\begin{array} { l c c c }
& \text { Pessimistic } & \text { Most Likely } & \text { Optimistic } \
\text { Investments } & - 100 & - 80 & - 60 \
\text { Total Revenues } & + 30 & + 40 & + 50 \
\text { Total Costs } & - 20 & - 15 & - 10
\end{array}$$
The cash flows are perpetuities and the cost of capital is 8%. What does a sensitivity analysis of NPV (without taxes) show?
A) 25, +232.50, +440
B) -100, +500, +800
C) -90, -55, -20
D) None of the above

Question

You have come up with the following estimates of project cash flows:
$$\begin{array} { l c c c } 
& \text { Pessimistic } & \text { Most Likely } & \text { Optimistic } \
\text { Investments } & - 100 & - 80 & - 60 \
\text { Total Revenues } & + 30 & + 40 & + 50 \
\text { Total Costs } & - 20 & - 15 & - 10
\end{array}$$
The cash flows are perpetuities and the cost of capital is 8%. What does a sensitivity analysis of NPV (without taxes) show?
A) 25, +232.50, +440
B) -100, +500, +800
C) -90, -55, -20
D) None of the above

Quizplus · Accepted Answer

The NPV is calculated as (Revenues - Costs - Investments) / Cost of Capital. For each scenario: Pessimistic: (30 - 20 - 100) / 0.08 = -112.5; Most Likely: (40 - 15 - 80) / 0.08 = 56.25; Optimistic: (50 - 10 - 60) / 0.08 = 500. The closest match is option A, which seems to have a typo in the pessimistic value.

You Have Come Up with the Following Estimates of Project