Table 12.1
A corporation is assessing the risk of two capital budgeting proposals. The financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows which are given in the following table. The firm's cost of capital is 10 percent.
-The expected net present value of Project A if the outcomes are equally probable and the project has five-year life is ________. (See Table 12.1)

Question

Table 12.1
A corporation is assessing the risk of two capital budgeting proposals. The financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows which are given in the following table. The firm's cost of capital is 10 percent. 
-The expected net present value of Project A if the outcomes are equally probable and the project has five-year life is ________. (See Table 12.1)

Quizplus · Accepted Answer

The expected net present value is the sum of the net present values of each outcome, weighted by the probability of that outcome. In this case, the outcomes are equally probable, so the expected net present value is simply the average of the net present values. The net present value of Project A is $17,910, so the expected net present value is also $17,910.

Table 12.1 A Corporation Is Assessing the Risk of Two Capital Budgeting