Question

There is a project of $ 5,000 which has 2 scenarios:

Positive: probability 70% flows: $ 8,000 for 2 years

Negative: probability 30% flows $ 3,000 for 2 years If the discount rate is 14%

solve the decision tree.

Answer 1

Calculation of NPV
Year	Cashflow	DF @14%	PV
0	$     (5,000)	1.0000	$ (5,000)
1	$        6,500	0.8772	$   5,702
2	$        6,500	0.7695	$   5,002
Net Present Value	$   5,704

Calculation of Expected cashflow
Year	Prob.	Cashflow	Expected Cashflow
1	0.7	$        8,000	$        5,600
0.3	$        3,000	$           900
		$        6,500
2	0.7	$        8,000	$        5,600
0.3	$        3,000	$           900
		$        6,500

Project is should be accepted.