-$150 in year 1. In year 2, each branch will produce three possible outcomes as shown in the 6. Calculate the Expected Net Present Value (NPV), Variance and Standard Deviation of this

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Q. 1 Suppose that we are considering the investment project which requires an initial investment outflow of $345. Given a resulting cash flows
of $600, $300 and -$150 in year 1. In year 2, each branch will produce three possible outcomes as shown in the table below. The risk-free
rate of return is 7.5%. Calculate the Expected Net Present Value (NPV), Variance and Standard Deviation of this investment project by using
probability tree approach.
YEAR 1
YEAR 2
Initial
Net Cash
Conditional
Net Cash Flow
Branch
Probability
P(1)
Probability P
(2/1)
0.20
Flow
$700
$200
$500
1
0.30
$600
0.40
2
0.40
3
0.30
-$100
4
$300
$300
$500
0.50
0.30
5
0.40
6
0.30
-$400
7
0.20
0.50
0.20
-$150
-$100
$200
9
Transcribed Image Text:Q. 1 Suppose that we are considering the investment project which requires an initial investment outflow of $345. Given a resulting cash flows of $600, $300 and -$150 in year 1. In year 2, each branch will produce three possible outcomes as shown in the table below. The risk-free rate of return is 7.5%. Calculate the Expected Net Present Value (NPV), Variance and Standard Deviation of this investment project by using probability tree approach. YEAR 1 YEAR 2 Initial Net Cash Conditional Net Cash Flow Branch Probability P(1) Probability P (2/1) 0.20 Flow $700 $200 $500 1 0.30 $600 0.40 2 0.40 3 0.30 -$100 4 $300 $300 $500 0.50 0.30 5 0.40 6 0.30 -$400 7 0.20 0.50 0.20 -$150 -$100 $200 9
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