A firm is considering investing $10 million today to start a new product line.The future of the project is unclear however and depends on the state of the economy.The project will last 5 years.The yearly cash flows for the project are shown below for the different states of the economy.What is the expected NPV for the project if the cost of capital is 12%?

Question

Quizplus · Accepted Answer

NPV of Each Outcome:
GOOD: N = 5,I=12%,PV=?,PMT= $8 ...PV = $30.33,NPV = $18.84
AVERAGE: N = 5,I=12%,PV=?,PMT= $3 ...PV = $11.37,NPV = $0.81
GOOD: N = 5,I=12%,PV=?,PMT= -$2 ...PV = -$7.58,NPV = -$17.21
EXP.NPV = .25*18.84 + .50*0.81 + .25*(-17.21)= $0.81

A Firm Is Considering Investing $10 Million Today to Start