The Oklahoma Pipeline Company projects the following pattern of inflows from an investment. The inflows are spread over time to reflect delayed benefits. Each year is independent of the others.

The expected value for all three years is $70.
a. Compute the standard deviation for each of the three years.
b. Diagram the expected values and standard deviations for each of the three years in a manner similar to Figure.
c. Assuming 6 percent and 12 percent discount rates complete the following table for present value factors.

d. Is the increasing risk over time, as diagrammed in part b, consistent with the larger differences in PVIFs over time, as computed in part c?
e. Assume the initial investment is $135. What is the net present value of the investment at a 12 percent discount rate? Should the investment beaccepted?

Transcribed Image Text:

ear ear 5 Year 10 Cash Cash InflowProbability Cash Inflow Probability Inflow Probability 40 20 40 40 70 100 20 70 120 40 40 85 .30 40 PVIF 690 943 PVIF 12% 893 Year Difference 050 10