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Home Insert Draw Page Layout Formulas Data Review View Help Cut ?? Wrap Text Arial copy . Format Painter 5-A- ???Merge & Center. B 1 -' Alignment Clipboard Font nt: do one decision tree for the operating cash flows and one for the cost of the project, then 12% Risk-free rate- ecision Tree Analysis NPV this Prob. Scenario x NPV 30% S0 30% .$1 $1 $1 s0 Expected NPV of Future Operating CFs $0.00 e Cost of Implementing Additional Project (Discount at Risk-free NPV this Prob. Scenario x PV 10 30% 30% Expected NPV of Future Operating CFS- $0.00 4 PV (NPV of Future Operating CF plus NPV of Future Year 3 cost of implenting additional project)- so.00 Build a Model Ready Type here to search

Explanation / Answer

Expected NPV can be calculated as follows -

Cost

Probability

1

2

3

4

5

6

NPV this scenario

prob x NPV

30%

9

9

9

9

9

9

27.00

8.10

-10

40%

4

4

4

0

0

0

-0.39

-0.16

30%

-1

-1

-1

0

0

0

-12.40

-3.72

Expected NPV

4.22

Probability

1

2

3

4

5

6

NPV this scenario

prob x NPV

30%

0

0

-10

0

0

0

-8.40

-2.52

40%

0

0

0

0

0

0

0.00

0.00

30%

0

0

0

0

0

0

0.00

0.00

Expected NPV

-2.52

PV = $ 4.22 -$ 2.52 = $ 1.7

Cost

Probability

1

2

3

4

5

6

NPV this scenario

prob x NPV

30%

9

9

9

9

9

9

27.00

8.10

-10

40%

4

4

4

0

0

0

-0.39

-0.16

30%

-1

-1

-1

0

0

0

-12.40

-3.72

Expected NPV

4.22

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