Sir in june 2018 joint probability question, how the examiner has caculated NPV. I cannot understand. Can you please explain. Rest of the things I have understood in this question , except NPV
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June 2018
7y ago#1The year 1 and year 2 flows have both been discounted to get the present values.
Then all the various possibilities have been listed (i.e. 1M in the first year and 2M in the second year; 1M in the first year and 3M in the second year; and so on) and the PV's added up to get the total PV for each possibility.
Then the expected PV has been calculated in the same way as in Paper F5 - by multiplying the total PV of each possibility by the probability of each possibility, and adding them up.
Sir the area which is confusing me is that
like in the first row of the table they have written 893 as PV of Y1 cashflow, 0.1 as prob, 1594 as PV of Y2 cashflow, 0.3 as prob, 2487 as total PV, 0.03 as joint prob, 74.6 as (PV x JP)
I have understood all these figs. What I have not understood is -1013 value which is written in NPV, which figs they have used to find -1013?
7y ago#32,487 is the total PV, if you subtract the initial cost of 3,500, then the NPV is -1,013.
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