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Qa)ii) Referring to answer scheme on expected PV of the Y2 – Y5, what does 0.8 and 0.2 represent ?
Qa)iv) What 0.3 represent in expected NPV calculation ?
0.2 is the probability of a recession (in which case the PV’s will be 40% lower) and so 0.8 is the probability that there will not be a recession).
The probability of regulatory approval happening is 0.7, and therefore the probability of not getting regulatory approval is 0.3.
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