Question
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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