Rf 0.

07
I -5,000

Period 1 Period 2 Period 3

Prob Cash flow Prob Cash flow Prob Cash flow
0.10 1,000 0.20 1,000 0.30 1,000
0.20 2,000 0.30 2,000 0.40 2,000
0.30 3,000 0.40 3,000 0.20 3,000
0.40 4,000 0.10 4,000 0.10 4,000

Expected cash flow per period

Period 1 Period 2 Period 3
100 200 300
400 600 800
900 1,200 600
1,600 400 400
3,000 2,400 2,100

Standard deviation of the probability distribution of possible net cash flows

400,000 392,000 363,000
200,000 48,000 4,000
0 144,000 162,000
400,000 256,000 361,000
1,000 916.52 943.40
 a) Find mean NPV
NPV = 1,614.217

b) Find Std. Dev about the mean

873438.728 640832 593044.579
1,451.659

c) Assuming normal distribution, P (NPV <= 0)

z= -1.11
p= 0.1335

d) P (NPV > 0)
0.8665

e) P (PI <= 1)
P (Present value of future cash flows is less than or equal to the Investment Cost)
Profitability Index = PW of future cash flows / Investment Cost
Let x = score to use in the z value
1 = (x) / 5,000
x= 5,000

Period Exp. Cash Flow

1 3,000
2 2,400
3 2,100
NPV 6,614.217

z = -1.1119803
p= 0.1335

f) P (PI > 2)
Let x = score to use in the z value
2 = (x) / 5,000
x= 10,000
z = 2.33235356
p= 0.9901
Therefore, p = 0.0099

g) Assuming perfect correlation exists, find the NPV and standard deviation
NPV = 1,614.217
Std. Dev = 934.579439 800.5198 770.093877
= 2505.19313
 Year 1 Year 2 a) Find Joint Probability
Prob Cash flow Prob Cash flow
0.40 1,500 0.30 1,000 0.12
0.40 1,500 0.16
0.30 2,000 0.12
0.60 2,500 0.40 2,000 0.24
0.40 2,500 0.24
0.20 3,000 0.12
 b) Find NPV c) Find Std. Dev
NPV
-809.92 236869.1
-396.69 157366.3
16.53 40161.19
925.62 26227.72
1,338.84 132777.8
1,752.07 160644.8
NPV 595.0413 868.3587
c) Find Std. Dev d) Assuming normal distribution, P (NPV < 0)
z= -0.69
p= 0.2451
Year 0 Year 1 Year 2 Year 3
Prob Cash Flow Prob Cash Flow Prob Cash Flow
1,000 0.50 0 0.60 0 1.00 0
0.40 -300 1.00 0
0.50 1,000 0.20 1,800 0.50 2,000
0.50 1,600
0.60 1,400 0.50 1,600
0.50 1,200
0.20 1,000 0.50 1,200
0.50 800
 a) Find NPV using Rf = 5% b) Find Std Dev
Joint Prob NPV
0.30 -1,000.00 828050.7
0.20 -1,272.11 747672.5
0.05 3,312.71 351478.5
0.05 2,967.17 265835.3
0.15 2,604.36 566279.6
0.15 2,258.83 382777.8
0.05 1,896.02 76216.78
0.05 1,550.48 39525.37
NPV 661.3757 1804.948
Proposal 1 and 2
NPV 18,000
Std Dev 6276.942

Proposal 2 and 3
NPV 14,000
Std Dev 6465.292

Proposal 1and 3
NPV 16,000
Std Dev 6693.28

Therefore, choose combination of Proposals 1 and 2. It dominates that of combinations 1 and 3 and 2 and 3 because it gives t
and 2 and 3 because it gives the highest NPV and lowest risk (or std. dev)