Calculate the expected NPV of each of the three projects and conclude whether it would be better to invest in X alone or in Y and Z. Calculate the four possible outcomes for the NPV if Y and Z are undertaken along with their associated probabilities. Calculate the probability of making a negative NPV if X alone is chosen or if Y and Z are chosen; comment on your results.
Calculate the expected NPV of each of the three projects and conclude whether it would be better to invest in X alone or in Y and Z. Calculate the four possible outcomes for the NPV if Y and Z are undertaken along with their associated probabilities. Calculate the probability of making a negative NPV if X alone is chosen or if Y and Z are chosen; comment on your results.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
4. Strathburn
Strathburn is a family-owned company which is reviewing its investment plans; it is currently looking at three projects for which £2 million has been put aside.
|
Project |
Investment |
PV of future cashflows |
Probability |
|
|
£ million |
£ million |
|
|
|
|||
|
X |
2.0 |
7.0 1.0 |
0.417 0.583 |
|
Y |
1.0 |
3.5 0.5 |
0.5 0.5 |
|
Z |
1.0 |
3.0 0 |
0.5 0.5 |
|
|
These projects are not divisible so the company could either invest in X alone or in Y and Z.
Required:
- Calculate the expected NPV of each of the three projects and conclude whether it would be better to invest in X alone or in Y and Z.
- Calculate the four possible outcomes for the NPV if Y and Z are undertaken along with their associated probabilities.
- Calculate the probability of making a negative NPV if X alone is chosen or if Y and Z are chosen; comment on your results.
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