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In order to calculate the expected value, you first need to calculate each of the possible total cash flows and the probability of each.
So…..if the first year is 16,000 and the second year is 20,000, then the total cash flow is 36,000 and the probability of this total is 0.15 x 0.75 = 0.1125
If the first year is 16,000 and the second year is (2,000), then the total cash flow is 14,000 and the probability of this total is 0.15 x 0.25 = 0.0375
If the first year is 12,000 and the second year is 20,000, then the total cash flow is 32,000 and the probability of this total is 0.60 x 0.75 = 0.45
Carry on in this way – the answer in the Revision Kit should now be clear.
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