Johnson Ltd. determined that the net present value of an investment in technological improvements at its plant in France would be €10,000,000 if pending litigation was resolved in the company's favor and would be €2,000,000 if the courts ruled against the company. Johnson's attorneys in France assessed the probability of a favorable ruling at 70%. What is the expected net present value of the project?

Question

Quizplus · Accepted Answer

Expected net present value = (probability of favorable ruling x net present value if ruling is favorable) + (probability of unfavorable ruling x net present value if ruling is unfavorable)
Expected net present value = (70% x €10,000,000) + (30% x €2,000,000) = €7,000,000 + €600,000 = €7,600,000