A firm is considering an investment project that today would cost $20,000. At the end of...
A firm is considering an investment project that today would cost $20,000. At the end of one year there is a 70% probability that the investment will pay out $28,000 and a 30% probability it will pay out $16,000. Using a 10% interest rate, what is the expected net present value of this investment?
Homework Answers
The cost of investment project today is $20,000.
The expected value of investment can be calculated by multiplying the respective probabilities with the returns on the investment. So, expected value after one year is equal to:
The present value of the expected return can be calculated by the formula:
Where r is the rate of interest and n is the number of periods.
Putting the values:
The net expected value of the investment can be calculated by subtracting the cost of investment. So,\
Expected Net Present Value = 22,181,818 - 20,000 = $2,181.818
Therefore, the expected net present value is equal to $2,181.818 (approximately).
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