QUESTION 1 Mr. Thompson is considering investing in two period projects with the

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QUESTION 1 Mr. Thompson is considering investing in two period projects with the following probabilities and cash flows Probability Cash Flow Period 1 25 50 .25 1000 1200 1400 Period 2 3 30 50 20 600 1000 1400 The discount rate is 7%, and the initial investment is $2,000. How much is the expected NPV of this project? Should Mr Thompson invest or not? Briefly explain your reasoning TT! Paragraph ,-.-. T.,.. Arial 3 (12pt) , Path: p Words:0 Click Save and Submit to save and submit. Click Save All Answers to save all answers Save All Answers Clc

Explanation / Answer

Expected cashflows of each year: Period1 Cash flows Probability Expected cashflows 1000 0.25 250 1200 0.5 600 1400 0.25 350 Expected CF of Year1 1200 Period2 Cash flows Probability Expected cashflows 600 0.3 180 1000 0.5 500 1400 0.2 280 Expected CF of Year2 960 Year Cashflows PVF @7% Present Vallue 0 -2000 1 -2000 1 1200 0.934579 1121.495 2 960 0.873439 838.5012 NPV -40 The Investment shall not made as NPV of the project is negative

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