Question

g Suppose you have a possible investment that costs $100 today but, starting one year from now, pays $5 in some years with probability 1/3, and in other years pays $10 with probability 1/3, and in other years pays 8$ with probability 1/3. That is, the probability distribution over possible payments ($5,$8,$10) is (1/3,1/3,1/3). What is the expected net present value of this investment

Answer 1

Answer:

Expected NPV=$666.67

Explanation:

Initial Cost=$100

NPV in case cash inflow is $5=-100+5/1%=$400

NPV in case cash inflow is $8=-100+8/1%=$700

NPV in case cash inflow is $10=-100+10/1%=$900

Expected NPV=(1/3)*400+(1/3)*700+(1/3)*900=$666.67