Economists at PHE Llc estimate a 20% probability of a recession next year, a 50% probability of an average economy, and a 30% probability of a rapid expansion. If there is a recession, the NPV of project O will be $20 million; if the economy is average, it will be $45 million and in case of a rapid expansion, it will be $75 million. What is the expected NPV of the project?
A) $57.5 million
B) $49 million
C) $46.67 million
D) $45 million

Question

Quizplus · Accepted Answer

The expected NPV can be calculated by multiplying each outcome by its probability and summing these products: (0.20 * $20 million) + (0.50 * $45 million) + (0.30 * $75 million) = $4 million + $22.5 million + $22.5 million = $49 million.

Economists at PHE Llc Estimate a 20% Probability of a Recession