A firm is evaluating the relative riskiness of two capital budgeting projects. The following table summarizes the net present values and associated probabilities for various outcomes for the two projects.
$\text { Net Present Value }$

$\begin{array}{rrr}\text { Probability }&\text { Project A }&\text { Project B }\
\hline 0.25 & -\$ 5,000 & 0 \
0.50 & 4,000 & \$ 2,000 \
0.25 & 10,000 & 8,000
\end{array}$
-The expected net present value for projects A and B are
A) $4,000 and $1,500, respectively.
B) $2,000 and $1,000, respectively.
C) $3,000 and $3,300, respectively.
D) $3,250 and $3,000, respectively.

Question

A firm is evaluating the relative riskiness of two capital budgeting projects.  The following table summarizes the net present values and associated probabilities for various outcomes for the two projects.
$\text { Net Present Value }$

$\begin{array}{rrr}\text { Probability }&\text { Project A }&\text { Project B }\
\hline 0.25 & -\$ 5,000 & 0 \
0.50 & 4,000 & \$ 2,000 \
0.25 & 10,000 & 8,000
\end{array}$
-The expected net present value for projects A and B are
A) $4,000 and $1,500, respectively.
B) $2,000 and $1,000, respectively.
C) $3,000 and $3,300, respectively.
D) $3,250 and $3,000, respectively.

Quizplus · Accepted Answer

The expected NPV is calculated by multiplying each outcome by its probability and summing the results. For Project A: (0.25 * -5000) + (0.50 * 4000) + (0.25 * 10000) = -1250 + 2000 + 2500 = $3,250. For Project B: (0.25 * 0) + (0.50 * 2000) + (0.25 * 8000) = 0 + 1000 + 2000 = $3,000.

A Firm Is Evaluating the Relative Riskiness of Two Capital Net Present Value \text { Net Present Value } Net Present Value

A Firm Is Evaluating the Relative Riskiness of Two Capital $\text { Net Present Value }$