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Hi,
If an NPV question gives you a probability of cash flows how do you work out what cash flow to put in what year.
For example the probability in year 1 of 150,000 is 40% and 220,000 is 50%
then in year two if year 1 cash flows increase by 150,000 …..
or in year two if year 1 cash flows increase by 220,000….Thanks
You use the expected values.
If it was like you are suggesting then you would effectively draw a decision tree (which you studied for F5). However he has only ever done something like this once, and it was actually very simple (and was not calculating NPV’s).(However, your year 1 example is not possible for the exam – what about the remaining 10%? 🙂 )
Oops yes I meant for year 1 60% instead of 50%.
So, I would have two NPV’s one for the expected values if Year 1 cash flows increase by 150,000 and another expected value and NPV if Year 1 cash flows increase by 220,000?
Thanks
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