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An investment project has a cost of $12,000, payable at the start of the first year of operation. The possible future cash flows arising from the investment project have the following present values and associated probabilities:
PV of Year 1 cash flow
Probability
PV of Year 2 cash flowProbability
$
$
16,000
0.15
20,000
0.75
12,000
0.60
(2,000)
0.25
(4,000)
0.25
What is the expected value of the net present value of the investment project (to the nearest $100)?
how do we attempt this ? we havent done this type of question , i looked at the answer but i didnt understand
Tot c/f Joint prob EV of cash flow
36,000 0·1125 4,050 which is . (16000 + 10000) * (0.15*0.75)
14,000 0·0375 525. Is (16000-2000) * (0.15*0.25)
32,000 0·4500 14,400. …..You keep going with this
10,000 0·1500 1,500.
16,000 0·1875 3,000
(6,000) 0·0625 (375)Then sun up the EV’s
23,100Less initial investment (12,000)
EV of the NPV
11,100
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