You are considering an investment project with two-year life. Due to the uncertainty in the market, three possible future outcomes at end of Years 1 & 2, and their probability of occurrence were determined in the table below. Outcome 1 has an occurrence probability equivalent to 25% (P(0.25)), outcome 2 with a probability of 45% (P(0.45)) and outcome 3 with a probability of 30% (P(0.3)). End of Outcome 1 Outcome 2 Outcome 3 Expected value P(F) Variance P(0.25) -8,000 3,000 6,000 year P(0.45) P(0.3) -8,000 -8,000 -8,000 1 7,000 15,000 13,000 21,240,000 2 10,000 9,900 a) Calculate the expected value at the end of year 1 and using an interest rate of 10%, compute the expected NPW value of the project. b) calculate the variance at year 0 and year 2 c) compute the variance of the Net Present Value distribution and compute the standard deviation of the project NPW distribution. d) determine the probability for the investment to have a positive NPW. d)

MATLAB: An Introduction with Applications
6th Edition
ISBN:9781119256830
Author:Amos Gilat
Publisher:Amos Gilat
Chapter1: Starting With Matlab
Section: Chapter Questions
Problem 1P
Question
P3
You are considering an investment project with
two-year life. Due to the
uncertainty in the market, three possible future
outcomes at end of Years 1 & 2, and their
probability of occurrence were determined in the
table below. Outcome 1 has an occurrence
probability equivalent to 25% (P(0.25)), outcome 2
with a probability of 45% (P(0.45)) and
outcome 3 with a probability of 30% (P(0.3)).
End of
Outcome 1
Outcome 2
Outcome 3
Expected value
P(F)
-8,000
Variance
year
P(0.25)
P(0.45)
P(0.3)
-8,000
-8,000
-8,000
1
3,000
7,000
15,000
21,240,000
2
6,000
10,000
13,000
9,900
a) Calculate the expected value at the end of year
1 and using an interest rate of 10%, compute the
expected NPW value of the project.
b) calculate the variance at year 0 and year 2
c) compute the variance of the Net Present Value
distribution and compute the standard deviation of
the project NPW distribution.
d) determine the probability for the investment to
have a positive NPW.
d)
Transcribed Image Text:You are considering an investment project with two-year life. Due to the uncertainty in the market, three possible future outcomes at end of Years 1 & 2, and their probability of occurrence were determined in the table below. Outcome 1 has an occurrence probability equivalent to 25% (P(0.25)), outcome 2 with a probability of 45% (P(0.45)) and outcome 3 with a probability of 30% (P(0.3)). End of Outcome 1 Outcome 2 Outcome 3 Expected value P(F) -8,000 Variance year P(0.25) P(0.45) P(0.3) -8,000 -8,000 -8,000 1 3,000 7,000 15,000 21,240,000 2 6,000 10,000 13,000 9,900 a) Calculate the expected value at the end of year 1 and using an interest rate of 10%, compute the expected NPW value of the project. b) calculate the variance at year 0 and year 2 c) compute the variance of the Net Present Value distribution and compute the standard deviation of the project NPW distribution. d) determine the probability for the investment to have a positive NPW. d)
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