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At Stage 2 of the decision tree it shows that if a project is successful, the...

At Stage 2 of the decision tree it shows that if a project is successful, the payoff will be $53,000 with a 2/3 chance of occurrence. There is also the 1/3 chance of a −$24,000 payoff. The cost of getting to Stage 2 (1 year out) is $24,000. The cost of capital is 15 percent. What is the NPV of the project at Stage 1?

−$349.16

−$231.88

$108.17

$133.33

$147.59

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Answer #1

Net Present Value [NPV] of the project at Stage 1

Net Present Value [NPV] of the project at Stage 1 = Initial Investment + [{(Cash flow in Year 1 x Probability) + (Cash flow in Year 1 x Probability)} / (1+Ke)]

= -$24,000 + [{($53,000 x 2/3) + (-$24,000 x 1/3)} / (1.15)]

= -$24,000 + [($35,333.33 - $8,000) / 1.15]

= -$24,000 + $23,768.12

= −$231.88

“Hence, The Answer is −$231.88”

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