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Hello Sir,
could you please help me with task a) ii) N161 from BPP revision.
The task is to calculate the probability of the investment having a negative NPV and I can not understand the logic from the answers.
Thank you in advance!
For each of the 9 possible outcomes (3 for the first year, and then for each of them 3 for the second year), we can calculate the NPV (the total of the two PV’s less the initial investment of 2,500).
We can also calculate the probability of getting each of the NPV’s by multiplying the probabilities of the two years together.
Some of the NPV’s are negative and so to get the total probability of the NPV being negative we simply add together the probabilities of those of the 9 outcomes that end up giving a negative NPV.
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