At stage 2 (1 year from now) of the decision tree, it shows that if a...

At stage 2 (1 year from now) of the decision tree, it shows that if a project is successful, the payoff will be $51247 with a 60% chance of occurrence. If unsuccessful, the payoff is $-21000. The cost of getting to stage 2 is $43577. The cost of capital is 15%. What is the NPV of the project at stage 1 (year 0)?

Expert Solution

probability of cash inflow= p.v at success ful + p.v. un successful

=$51247*0.6*(1/1+0.15)¹+ $21000*0.4*(1/1+0.15)¹

=$26737+$7304

=$34042

NPV = P.V OF CASH INFLOW - P.V OF CASH OUT FLOW

=$34042-$43577

=(-VE)$9535

AS NPV IS NEGITIVE WE WILL NOT ACCEPT

PLEASE COMMENT

jeff jeffy answered 2 years ago

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