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1. How to calculate the probability that project will fail to achieve a positive NPV? BPP gives a too complex table to calculate the EV of NPV and therefore get a probability. But I just simply use the probability to times the relevant cash flow and also get the EV but fail to get the probability.
2. Can I use the theory of similar triangles to calculate the probability that NPV equals to zero and then the probability below the result is the probability that a project fails to achieve a positive NPV?
3. How to calculate the standard deviation of NPV and is it required to master in F9?
4. BPP gives two examples of the possible cash flow, one is that Year 1 and Year 2 are relatively independent and the other is that the probability of Year 2’s cash flows depends on that of Year 1’s change. For the latter, could the standard deviation exist?
Thanks for your help.
1. I cannot comment specifically on whatever question you are referring to in the BPP book, but in general terms you need to calculate all the possible NPV’s and then add up the probabilities of those giving a positive NPV.
2. There is no such thing as ‘the theory of similar triangles’! Some people use similar triangles to calculate the IRR (although I think it is ridiculous way as you will know from my free lectures 🙂 ). However calculating the IRR will not help in this sort of question.
3. Standard deviations are not relevant in Paper F9. If you want to know how to calculate it then look at the P4 lectures (although even in P4 you can no longer be required to calculate it).
4. Standard deviations are a measure of the level of uncertainty – they are a measure and as such do not ‘exist’. However, again, they are not relevant for F9.
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