- September 7, 2021 at 8:16 am #634683NikitagarwalParticipant
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past paper -2018 Copper Co.
question a.1st part about expected NPV
can you help me understand the how did they calculated that ?and the PV ?September 7, 2021 at 4:01 pm #634756John MoffatKeymaster
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There are three possible cash flows in the first year, and for each of the three there are three possible cash flows in the second year.
So first we need to list all the possible outcomes and calculate the PV of the flows.
For example, if the first year is 1,000,000 and the second year is 2,000,000. Discounting both of them and adding them up gives a total present value of 2,487 (and given the the initial investment is 3,500, the NPV is 2,487 – 3,500 = (1,013).
The probability of 1,000,000 in the first year is 0.1 and the probability of also getting 2,000,000 in the second year is 0.3, so the probability of both flows happening is 0.1 x 0.3 = 0.03.
So to arrive at the overall expected present value, then (as you will remember from Paper PM or whatever exempted you from PM) we multiply each of the PV’s by the probabilities, and add them up.
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