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    neerajliba
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    This document compares two investment projects, Project A and Project B. Project A has a net present value (NPV) of Rs. 29,332.10 from a direct cash flow. Project B models the cash flows as a decision tree with probabilities. It calculates the expected NPV of Project B is also Rs. 29,332.10. However, Project B carries more risk due to its probabilities. Therefore, Project A is deemed the optimal investment since it has the same return as Project B but with less risk.

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    This document compares two investment projects, Project A and Project B. Project A has a net present value (NPV) of Rs. 29,332.10 from a direct cash flow. Project B models the cash flows as a decision tree with probabilities. It calculates the expected NPV of Project B is also Rs. 29,332.10. However, Project B carries more risk due to its probabilities. Therefore, Project A is deemed the optimal investment since it has the same return as Project B but with less risk.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
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    4 views3 pages

    Decision Tree Complete

    Uploaded by

    neerajliba
    This document compares two investment projects, Project A and Project B. Project A has a net present value (NPV) of Rs. 29,332.10 from a direct cash flow. Project B models the cash flows as a decision tree with probabilities. It calculates the expected NPV of Project B is also Rs. 29,332.10. However, Project B carries more risk due to its probabilities. Therefore, Project A is deemed the optimal investment since it has the same return as Project B but with less risk.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 3

    2010

    Anto Vikram [F09068]


    Senthil Selvan [F09112]

    DECISION TREE
    CEPC- Assignment 1
    1. Anto Vikram [F09068]
    2. Senthil Selvan [F09112]

    Evaluation of Alternatives:

    Project A:

    Investment Year 1 Year 2 Hurdle rate NPV


    Rs. -3,00,000.00 Rs. 2,00,000.00 Rs. 2,00,000.00 14% Rs. 29,332.10

    The NPV realized is Rs. 29,332.10 from Project A.

    Project B:

    Decision Tree:

    150000

    0.3
    0.5 180000
    180000
    0.3
    0.5
    200000

    -300000 180000
    0.5
    0.3
    0.4 220000
    220000
    0.3
    270000
    1. Anto Vikram [F09068]
    2. Senthil Selvan [F09112]

    Path NPV Joint Prob Expected NPV


    1 Rs. -26,685.13 0.15 Rs. -4,002.77
    2 Rs. -3,601.11 0.2 Rs. -720.22
    3 Rs. 11,788.24 0.15 Rs. 1,768.24
    4 Rs. 31,486.61 0.15 Rs. 4,722.99
    5 Rs. 62,265.31 0.2 Rs. 12,453.06
    6 Rs. 1,00,738.69 0.15 Rs. 15,110.80
    Rs. 29,332.10

    The NPV realized is Rs. 29,332.10 from Project B.

    Conclusion:

    Project A and Project B give the same returns. Hence either one can be selected. But given the
    associated risks (probabilities) in Project B, Project A will be the optimal investment.

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