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Simpkins Trucking

Price: $1.99

Simpkins Trucking of Stillwater, OK, is also considering the acquisition of Armour Transport.
Simpkins has analyzed the annual cash flows for Armour Transport and come up with
these estimates for each of the three states of the economy shown below:

Scenario I Scenario II Scenario III
(State of the Economy) Recession Normal Expansion
Probability 20% 50% 30%
Cash flow for each scenario  (50,000)  150,000  250,000

Simpkins’ management is much more optimistic about the economy.
In fact, they estimate the probability of a recession next year at only 10% the probability of a
normal state of the economy at 50% and the probability of expansion at 40%

a. Based on Simpkins’ estimated probabilities for each state of the economy, what is
your estimate of expected cash flows for the Armour Trucking company?
b. How do you think that Simpkins’ optimism about the state of the economy will
impact the outcome of acquisition? Who is more likely to complete the acquisition
deal, other things being equal?

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