Next year, a cash flow is expected to be $1,000.00 (40% probability)or $2,000.00 (60% probability). The following year, the same cash flow possibilities exist in the same manner as the previous year. What is the probability of the cash flow in the second year being $2,000.00?
A)36%
B)60%
C)24%
D)16%

Question

Quizplus · Accepted Answer

There are two possible scenarios for cash flow each year. Therefore, there are four possible outcomes for cash flow over the two years: $1,000 followed by $1,000, $2,000 followed by $1,000, $1,000 followed by $2,000, and $2,000 followed by $2,000. 
The probability of the cash flow being $2,000 in the second year is the combined probability of the last two outcomes, which is 0.6 x 0.6 = 0.36 or 36%.

Next Year, a Cash Flow Is Expected to Be $1,000