A cash flow is expected to be $500.00 (50% probability)or $1,000.00 (50% probability)next year. Assuming the cash flow next year is $500.00, the cash flow the following year is $400.00 (60% probability)or $600.00 (40% probability). Assuming the cash flow next year is $1,000.00, the cash flow the following year is $1,200.00 (80% probability)or $2,000.00 (20%)probability. What is the probability of a $1,200.00 cash flow two years from today?

Question

Quizplus · Accepted Answer

40%The probability of a $1,200.00 cash flow two years from today involves two steps: first, the cash flow next year needs to be $1,000.00, which has a 50% probability. Then, given that the cash flow is $1,000.00 next year, the probability of it being $1,200.00 the following year is 80%. Therefore, the combined probability is 50% * 80% = 40%.

A Cash Flow Is Expected to Be $500