A project requires $100,000 as first cost (investment). Three scenarios were ide
ID: 2461518 • Letter: A
Question
A project requires $100,000 as first cost (investment). Three scenarios were identified, and the following table presents the values of the project key parameters associated with these scenarios:
Key project parameters
Scenario 1
Scenario 2
Scenario 3
Net annual savings, $$
20,000
25,000
30,000
Depreciation rate, %
6
4
2
Service life, years
5
7
10
Probabilities of the first two scenarios are 0.3 and 0.2 respectively. Calculate the expected value of the project's annual worth if market interest rate is 5.5%
Key project parameters
Scenario 1
Scenario 2
Scenario 3
Net annual savings, $$
20,000
25,000
30,000
Depreciation rate, %
6
4
2
Service life, years
5
7
10
Explanation / Answer
Probability of senario 3 = 1- .3 -.2 = .5
Expected value of project annual worth = (20000 * .3)+(25000 * .2)+ (30000 *.5)
= 6000 + 5000 + 15000
= $ 26000
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