question archive Mr Smith is considering an investment proposal of JMD50,000
Mr Smith is considering an investment proposal of JMD50,000
Subject:FinancePrice:2.86 Bought11
Mr Smith is considering an investment proposal of JMD50,000.00. The return during the life of the investment are as follows: Year 1 Events Cash Flow probability 25,000.00 0.4 20,000.00 0.5 40,000.00 0.1 111 25,000.00 20,000.00 40,000.00 Events Cash Flow probability Cash Flow probability Cash Flow probability 30,000.00 0.2 100,000.00 0.1 25,000.00 ii 20,000.00 0.6 30,000.00 0.8 40,000.00 25,000.00 0.2 40,000.00 0.1) 60,000.00 0.2 0.5 0.3 Using 20% cost of capital, advise the acceptability of the proposal.
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There are 9 possible scenario. we will determine each scenario NPV and their joint probability to reach expected NPV.
| Scenario | Year 1 | Year 2 | NPV | Join Probability | NPV * JP |
| 1 | 25000 | 30000 | -8335.5 | 0.08 | -666.84 |
| 2 | 25000 | 20000 | -15279.5 | 0.24 | -3667.08 |
| 3 | 25000 | 25000 | -11807.5 | 0.08 | -944.6 |
| 4 | 20000 | 100000 | 36106 | 0.05 | 1805.3 |
| 5 | 20000 | 30000 | -12502 | 0.4 | -5000.8 |
| 6 | 20000 | 40000 | -5558 | 0.05 | -277.9 |
| 7 | 40000 | 25000 | 692 | 0.02 | 13.84 |
| 8 | 40000 | 40000 | 11108 | 0.05 | 555.4 |
| 9 | 40000 | 60000 | 24996 | 0.03 | 749.88 |
| Expected NPV | -7432.8 |
Here NPV = CF 1 * PVF 1 + CF 2 * PVF 2 - Investment
i.e. CF1 * 0.8333 + CF2 * 0.6944 - 50000
Joint Probability = Probability Year 1 * Probability Year 2
Since the expected NPV is negative hence we will not accept the project.
