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Hello John,
Its BPP KIT Question 18, 2017 edition, part B.
In model answers it calculates the standard deviation between the expected NPV and zero as 1.9265. Then the answer comments that the figure arrived suggest that this project has 97.3% probability that it will have a positive NPV or conversely a 2.7 percent of a negative NPV.
My question is how are these probabilities arrived at ?Then further down in calculating project VAR he puts 3.162 in the equation I don’t get where this number comes from. It is not given anywhere in the question.
Could you suggest please I know how to calculate the VAR. thanks to your lecture.
If you look up 1.93 in the tables, then you get 0.4726. If you add 0.5 (the reason is explained in the lecture) you get 0.9726 or 97.3%
As is written in the answer (and explained in my lecture) the project VaR is SD x sq root of t
Since there are 10 years, the sq root of 10 = 3.162
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