Math Problem Solver

The project will have an initial outlay of £2m has a 0.55 probability of producing a return of £1.7m in Year 1

and a 0.45 probability of delivering a return of £1m in Year 1. If the £1.7m results occurs, then the second year

could return either £2.8m (probability of 0.6) or £1.9m (probability of 0.4). If the £1m result for Year 1 occurs,

then either £1.1m (probability 0.5) or £600,000 (probability of 0.5) could be received in the second year. All

cash flows occur on anniversary dates. The discount rate for this project is 15%.

Required:

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1) Calculate:

a) The expected NPV.

b) The standard deviation of NPV.

c) The probability of the NPV being less than zero assuming a normal distribution of return

– (bell shaped and symmetrical about the mean)