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
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122 BPP
2y ago
2y ago#1Tot 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
23,100
Less initial investment (12,000)
EV of the NPV
11,100
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