Nordalis licenses out a process patent. Next year's net royalties, received at year-end, will depend on demand: 50,000 if it weakens (30 % chance), 60,000 if it holds steady (40 %) and 80,000 if it grows (30 %). The rate of 5 % provided by group treasury is consistent with cash flows already weighted by their probabilities. Determine the expected cash flow and its present value.
- Royalties if demand weakens
- 50,000
- Probability of weaker demand
- 30 %
- Royalties if demand holds steady
- 60,000
- Probability of steady demand
- 40 %
- Royalties if demand grows
- 80,000
- Probability of growing demand
- 30 %
- Discount rate
- 5 %