There is a project of $ 5,000 which has 2 scenarios: Positive: probability 70% flows: $...

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.

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Expert Solution

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.

jeff jeffy answered 1 year ago

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