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Question 32 of March/June 2018-How did the examiner arrived at the NPV please?
He calculated the PV of the year 1 and year 2 flows at the discount rate of 12% and then multiplied by the probabilities and added up the total in order to get the expected NPV.
Have you watched my free lectures on discounted cash flow and on expected values?
I assume that you are referring to the NPV column in the answer.
If the cash flow in the first year is $1M and the cash flow in the second year is $2M, then the total PV is 2,487, and the NPV is 2,487 less the investment of 3,500, which is (1,013).
If the cash flow in the first year is $1 and the cash flow in the second year is $3M, then the total PV is 3,284, and the NPV is 3,284 less 3,500 which is (216).
The same logic applies to all the other possible outcomes 🙂
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