Answer with its Explanation:
<u>Requirement 1. Expected Annual Savings and Expected NPV</u>
As we know that:
Expected Value = Probability P1 * Expected Value E1 + Probability P2 * Expected Value E2 + Probability P3 * Expected Value E3 + ....... Probability Pn * Expected Value En
Here
P1 is 0.3 and E1 is $7000
P2 is 0.4 and E2 is $8500
P3 is 0.3 and E3 is $9500
By putting values, we have
Expected Annual Savings = 0.3 * $7,000 + 0.4 * $8,500 + 0.3 * $9,500 = $8,350
The above amount would be for first four years, hence it must be discounted using the annuity formula to calculate the present value of four annual receipts.
Annuity = [1 - (1 + r)^-n] / r
By putting values, we have:
Annuity = $8,350 * [1 - (1 + 12%)^-4] / 12%
And
Expected NPV = ($25,000) + $8,350 * [1 - (1 + 12%)^-4] / 12%
= $361.87
<u>Requirement 2. Probable Return Percentage</u>
Return Percentage = NPV / Investment = $361.87/ $25,000
= 1.45%
<u>Requirement 3. Associated risk</u>
As we know that
Minimum return = Minimum annual savings – Uniform annual costs
Here
Minimum annual savings are $7,000
Uniform Annual Costs were $8,350
By putting values, we have:
Minimum return = $7,000 – $8,350 = -$1,350 per year
<u></u>
<u>Requirement 4. Risk Amount Percentage</u>
Risk Amount percentage = Minimum Return / Uniform annual costs * 100
Risk Amount percentage = $1,350 / 8,350 * 100 = 16.17%
