A project requires investment of 160,000 dollar at year zero. There are 4 possib

Question

A project requires investment of 160,000 dollar at year zero. There are 4 possible outcomes anticipated for this investment:

1) 25% probability of success with annual income of 40,000 dollars for 10 years (starting from year 1 to year 10) and zero salvage value

2) 40% probability of success with annual income of 30,000 dollars for 10 years (starting from year 1 to year 10) and zero salvage value

3) 20% probability of success with annual income of 20,000 dollars for 10 years (starting from year 1 to year 10) and zero salvage value

4) 15% probability of failure with zero annual income and salvage value of 70,000 dollar in the end of year 1.

Calculate ENPV, considering minimum ROR 10%, explain if this is a good investment. Explain your work in detail including all the required equations and calculations.

Explanation / Answer

As per the details given we have to find out the Expected Cash Flow for each Year and thereafter Expected NPV.

Below is working for Expected NPV

As Expected NPV is Negative this investment is not good.

Year Cash Flow Probability Expected Cash Flow Present Value ENPV Year-0 -160000 1 -160000 1 -160000 1 40000 0.25 10000 0.9091 9090.909 30000 0.4 12000 0.9091 10909.09 20000 0.2 4000 0.9091 3636.364 70000 0.15 10500 0.9091 9545.455 2 to 10 40000 0.25 10000 4.8499 48499 30000 0.4 12000 4.8499 58198.8 20000 0.2 4000 4.8499 19399.6 Expected NPV -720.782

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