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Itsoseng NGO is evaluating a two-year project that has the following probability distribution of returns: The events in each year are independent of other years

Itsoseng NGO is evaluating a two-year project that has the following probability

distribution of returns: The events in each year are independent of other years (that

is, there are no conditional probabilities). An outlay of R15 000 is payable at Time 0

and the other cash flows are receivable at the year ends. The risk-adjusted discount

rate is 11 per cent.

Year 1 Year 2
Return Probability Return Probability
8 000 0.1 4 000 0.3
10 000 0.6 8 000 0.7
12 000 0.3

Calculate:

1.1. The expected NPV. (5)

1.2. The standard deviation of NPV. (5)

12

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1.3. The probability of the NPV being less than zero assuming a normal

distribution of return (bell shaped and symmetrical about the mean). (5)

1.4. Interpret the figure calculated in (1.3 above). (5)

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