Chapter 10: Risk and Uncertainty

Wanjiru plc is considering launching a new product, which needs additional capital investment of $200,000. The selling price will be $10 per unit. The probability of demand of 50,000 units a year is 0.5, with a probability of 0.4 that demand will be 20% higher and 0.1 that it will be 20% lower.

The company expects to earn a contribution of 50% of the selling price, and fixed overheads will increase by $140,000 a year. The time horizon for the appraisal is 4 years; the machine will then be sold for $50,000. The cost of capital is 20% a year (4-year annuity factor 2.589; year 4 discount factor 0.482).

Calculate the expected NPV of the project.