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questions 32 (a)(i)
i’m a bit confuse when i checked the answer.
how do i get pv cash flow for year 1?You discount for 1 year at the discount rate of 12%.
So a cash flow of $1M discounts to $1M x 0.893 = 893,000
A cash flow of $2M discounts to $2M x 0.893 = 1,786,000,
and a cash flow of $3M discounts to $3 x 0.893 = 2,679,000Hi John,
I am a bit confused with this question.
Looking at line 1:
We have the discounted PV of 893 for year 1, discounted PV of 1594 for year 2 – hence a total PV of 2487.
A probability of 0.1 for year 1 and 0.3 for year 2 – so a joint probability of 0.03The PV * JP = 2487 * 0.03 = 74.6
My question is: where is the NPV of (1013) coming from?
I tried all combinations, and cannot figure it out.Thank you in advance
The total PV of the inflows is 2,487.
The investment at time 0 is 3,500.
Therefore the NPV is 2,487 – 3,500 = (1,013)
You should remember from Paper MA (was F3) and from Paper PM (was F5) that the expected value of anything is the weighted average i.e multiplying the each value by its probability, and then adding up the results.
I do explain this (with an example) in my free lectures on Chapter 10 of our free lecture notes.
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