A decision tree shows a 30% probability of $2 million in returns and a 70% chance of $1 million in returns.What is the maximum you would invest today in this project if the cash inflow occurs one year in the future and the discount rate is 10%?
A) $818,182
B) $1,181,818
C) $1,300,000
D) $1,363,636

Question

Quizplus · Accepted Answer

The expected cash inflow is (0.3 * $2,000,000) + (0.7 * $1,000,000) = $1,300,000. The present value of this amount, discounted at 10% for one year, is $1,300,000 / 1.10 = $1,181,818.

A Decision Tree Shows a 30% Probability of $2 Million