Dependent Cash Inflows and Expected NPV. The Newcome Corporation has determined that its after-tax cash inflow (ATCI) distributions are not independent. Further, the company has estimated that the...

Dependent Cash Inflows and Expected NPV. The Newcome Corporation has determined that its after-tax cash inflow (ATCI) distributions are not independent. Further, the company has estimated that the year 1 results (ATCI1) will affect the year 2 flows (ATCI2) as follows:

If ATC_I1= $40,000 with a 30 percent chance, the distribution for ATCI₂
is:

0.2          $20,000

0.6          $50,000

0.2          $80,000

If ATC_I1= $60,000 with a 40 percent chance, the distribution for ATCI₂
is:

0.3          $70,000

0.4          $80,000

0.3          $90,000

If ATC_I1= $80,000 with a 30 percent chance, the distribution for ATCI₂
is:

0.1          $ 80,000

0.8          $100,000

0.1          $120,000

Assume that the project’s initial investment is $100,000.

(a) Set up a decision tree to depict the above cash flow possibilities, and calculate an expected NPV for each 2-year possibility using a risk-free rate of 15 percent. (b) Determine if the project should be accepted.