Question

Your company is considering a project with an initial outlay of $1,000 in year zero and the following cash flows over the next 4 years:

Year	Cash flow
1	200
2	300
3	400
4	500

Assuming cost of capital is 11%:

Use Scenario manager to calculate Expected NPV (format your answer to 2 decimal places) given the following three scenarios and their probabilities of occurrence:

Scenario	Cost of capital	Probability
Best case scenario	9%	25%
Most likely case Scenario	11%	55%
Worst case scenario	13%	20%

Answer 1

Calculation of NPV if cost of capital is 11%:

NPV = Cash inflows - Cash outflows

Calculation Of cash inflows :

Cash flows (1)	Discount rate @11% (2)	Discounted cash inflows (3) (1*2)
200	0.9009	180.18
300	0.8116	243.48
400	0.7312	292.48
500	0.6587	329.35
	Cash inflows	1045.49

NPV = 1045.49-1000 = 45.49

Calculation of NPV @9%:

Cash flows (1)	Discount rate @9% (2)	Discounted cash inflows (3) (1*2)
200	0.9174	183.48
300	0.8417	252.51
400	0.7722	308.88
500	0.7084	354.20
	Cash inflows	1099.07

NPV = 1099.07-1000 = 99.07

Calculation of NPV @13%:

Cash flows (1)	Discount rate @13% (2)	Discounted cash flows (3) (1*2)
200	0.8849	176.98
300	0.7831	234.93
400	0.6930	277.20
500	0.6133	306.65
	Cash inflows	995.76

NPV = 995.76-1000 = -4.24

NPV of the project:

Probability (1)	NPV calculated (2)	Expected NPV (3) (1*2)
0.25	99.07	24.767
0.55	45.49	25.019
0.20	-4.24	-0.848
	ExpectedNPV	48.938

Expected NPV = 48.94 (rounded to 2 decimals)