Bradford services inc. (bsi) is considering a project that has a cost of $10 million and an expected life of 3 years. there is a 30 percent probability of good conditions, in which case the project will provide a cash flow of $9 million at the end of each year for 3 years. there is a 40 percent probability of medium conditions, in which case the annual cash flows will be $4 million, and there is a 30 percent probability of bad conditions and a cash flow of $1 million per year. bsi uses a 12 percent cost of capital to evaluate projects like this. find the project's expected cash flows and npv.

Expected Net Cash Flow = $3.8 million

Net Present Value (NPV) = $1.0492 million

Explanation:

Given Cash outflow = $10 million

Provided cash inflows as follows:

Particulars           Good condition         Moderate condition        Bad Condition

Probability                  30%                               40%                                  30%

Cash flow                $9 million                     $4 million                       $1 million

Average expected cash flow each year = ($9 million X 30 %) + ($4 million X 40%) + ($1 million X 30%) = $2.7 million + $1.6 million + $0.3 million = $4.6 million

Three year expected cash flow = ($4.6 million each year X 3) - $10 million = $13.8 million - $10 million = $3.8 million

While calculating NPV we will use Present Value Annuity Factor (PVAF) @12% for 3 years =

NPV = PV of inflows - PV of Outflows = $4.6 million X 2.402 - $10 million = $11.0492 million - $10 million = $1.0492 million

Expected Net Cash Flow = $3.8 million

Net Present Value (NPV) = $1.0492 million