The group estimates an NPV of $10 million if the population growth is 10% (40% probability), an...

Question:

The group estimates an NPV of $10 million if the population growth is 10% (40% probability), an NPV of $4 million if the population does not grow (30% probability), and an NPV of -$4 million if the population shrinks by 5% (30% probability). What is the expected value of NPV?

Answer and Explanation:

Expected NPV is the sum of the weighted NPV of each possibility based on their probability outcomes:

  • NPV = ($10,000,000 * 40%) + ($4,000,000 * 30%) + (-$4,000,000 * 30%)
  • NPV = $4,000,000 + 1,200,000 - 1,200,000
  • NPV = $4,000,000

Learn more about this topic:

How to Calculate Net Present Value: Definition, Formula & Analysis

from Financial Accounting: Help and Review

Chapter 5 / Lesson 20
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