Table 11.7
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 11.7)

Question

Table 11.7
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 11.7)

Quizplus · Accepted Answer

The expected NPV is the sum of the NPVs of each outcome multiplied by the probability of that outcome. In this case, the outcomes are equally probable, so the expected NPV is the average of the NPVs of each outcome. The NPVs of each outcome are given in Table 11.7, and the average of these NPVs is $17,910.

Table 11.7 A Corporation Is Assessing the Risk of Two Capital Budgeting