Question 2

A project requires an immediate outflow of cash of R400,000 in return for the following probable cash flows:

State of Economy Probability End of year 1 (Rands) End of year 2 (Rands)

Recession 0.3 100,000 150,000

Growth 0.5 300,000 350,000

Boom 0.2 500,000 550,000

Assume that the state of the economy will be the same in the second year as in the first. The required rate of return is 8 per cent. There is no tax or inflation.

Required:

2.1) Calculate the expected NPV. (10)

2.2) Calculate the standard deviation of NPV and the coefficient of variance of the NPV. Interpret these results taking into consideration of the state of economy (10)