Compute Expected Values (L.O.1): Welcome Homes, Inc.. is considering the alternatives of renovating a building and renting it or purchasing a new building and renting it. The new rental market in the area is fairly stable. An investor can purchase a $10 million building. Assuming a three-year holding period, the project will have a net present value of $2 million, after subtracting the $10 million cost. Renovation property is riskier because the costs of the renovation are less certain than new construction. A typical renovation project may require the same $10 million cost. However, after completion of the renovation, the project may have a different present value than the new construction. Indeed. Welcome Homes' management has prepared the following schedule of net present values after subtracting the $10 million cost for the renovation project:

To simplify the analysis, assume there are no other possible outcomes from the renovation project.

Required: What is the expected net present value of the renovation project?

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Net Present Value (millions) $-2 1 2232- 21469 .1 Probability