The estimated annual cash flow of an investment project along with associated probabilities are given below....
The estimated annual cash flow of an investment project along
with associated
probabilities are given below. Determine the expected present worth
of this annual cash
flow series at an interest rate of 11% per year.
| Year | P = 0.5 | P = 0.4 | P = 0.1 |
|---|---|---|---|
| 0 | ($57,000) | ($59,000) | ($57,500) |
| 1 | $3100 | $3000 | $3100 |
| 2-6 | $3250 | $3000 | $3100 |
| 7 | $3400 | $6000 | $3100 |
Homework Answers
i = 11%
Expected PW = 0.5 x PW1 + 0.4 x PW2 + 0.1 x PW3
PW1 = -57000 + 3100/1.11 + 3250/1.112 + .... + 3250/1.116 + 3400/1.117 = - $ 41748.25
PW2 = -59000 + 3000/1.11 + 3000/1.112 + .... + 3000/1.116 + 6000/1.117 = - $ 43418.436
PW3 = -57500 + 3100/1.11 + 3100/1.112 + .... + 3100/1.117 = - $ 42892.19
Expected PW = - $ 42530.72
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The estimated annual cash flow of an investment project along
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