You have a contract with a company in the remote country of Placidia which guarantees you a profit of 100 000 Placidos in five years time. At the moment, one Placido is equal to one Canadian dollar. However, there is about to be an election in Placidia, and if the Placidia First candidate gets in, it is expected that there will be 10% annual inflation in Placidia over the next five years. As far as you can tell, each of the two candidates has an equal chance of being elected. If your MARR is 10%, what is the expected present value to you of the contract, in Canadian dollars?
A)$38 554
B)$50 323
C)$62 091
D)$82 645
E)$86 777

Question

Quizplus · Accepted Answer

The expected present value of the contract is the sum of the present values of the two possible outcomes, each weighted by its probability. The present value of the contract if the Placidia First candidate wins is $38,554, and the present value of the contract if the other candidate wins is $86,777. Since each candidate has an equal chance of winning, the expected present value of the contract is the average of these two values, which is $62,665.

You Have a Contract with a Company in the Remote