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    Joint Probability

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    203 764 Swathi
    If the cash flows across years are dependent, the expected NPV should be calculated using a joint probability approach considering the cash flows and probabilities across multiple years. The document calculates the expected NPV of a two year project as $598.85 based on the discounted cash flows and joint probabilities in each year. It notes there is a 24% probability of a negative NPV and the most likely outcome has an NPV of $1570 with a probability of 24%.

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    Joint Probability

    Uploaded by

    203 764 Swathi
    38 views8 pages
    If the cash flows across years are dependent, the expected NPV should be calculated using a joint probability approach considering the cash flows and probabilities across multiple years. The document calculates the expected NPV of a two year project as $598.85 based on the discounted cash flows and joint probabilities in each year. It notes there is a 24% probability of a negative NPV and the most likely outcome has an NPV of $1570 with a probability of 24%.

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    If the cash flows across years are dependent, the expected NPV should be calculated using a joint probability approach considering the cash flows and probabilities across multiple years. The document calculates the expected NPV of a two year project as $598.85 based on the discounted cash flows and joint probabilities in each year. It notes there is a 24% probability of a negative NPV and the most likely outcome has an NPV of $1570 with a probability of 24%.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    38 views8 pages

    Joint Probability

    Uploaded by

    203 764 Swathi
    If the cash flows across years are dependent, the expected NPV should be calculated using a joint probability approach considering the cash flows and probabilities across multiple years. The document calculates the expected NPV of a two year project as $598.85 based on the discounted cash flows and joint probabilities in each year. It notes there is a 24% probability of a negative NPV and the most likely outcome has an NPV of $1570 with a probability of 24%.

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    © All Rights Reserved
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    IF THE CASHFLOWS ACROSS THE YEARS ARE DEPENDANT, THEN THE EXPECTE

    D.22
    YEAR CF DF 10% DISCOUNTED CF
    200 181.82
    1 400 0.909090909090909 363.64
    600 545.45

    0 0
    2 200 165.29
    400 0.826446280991735 330.58
    600 495.87
    700 578.51

    COPPER CO
    YEAR 1 YEAR 2
    Y1 DICOUNY1 PROB. Y2 DISCOUNTED CF Y2 PROB JOINT CF
    893 0.1 1594 0.3 2487
    893 0.1 2392 0.6 3284
    893 0.1 3986 0.1 4879

    1786 0.5 1594 0.3 3380


    1786 0.5 2392 0.6 4177
    1786 0.5 3986 0.1 5772

    2679 0.4 1594 0.3 4273


    2679 0.4 2392 0.6 5070
    2679 0.4 3986 0.1 3986

    EXPECTED CASH FLOW


    LESS:INITIAL INVESTMENT
    1 EXPECTED NPV
    2 PROB HAVING A NEGATIVE NPV
    3 MOST LIKELY OUTCOME
    JOINT PROBABILITIES
    ARE DEPENDANT, THEN THE EXPECTED NPV SHOULD BE CALCULATED USING JOINT PROBABILITY APPROACH

    Y1 DISCOUNTED CF Y1 PROBABILITY Y2 DISCOUNTED CF Y2 PROBABILITY JOINT CF


    181.82 0.25 0 0.25 181.82
    181.82 0.25 165.29 0.5 347.11
    181.82 0.25 330.58 0.25 512.40

    363.64 0.5 165.29 0.25 528.93


    363.64 0.5 330.58 0.5 694.22
    363.64 0.5 495.87 0.25 859.51

    545.45 0.25 330.58 0.25 876.03


    545.45 0.25 495.87 0.5 1041.32
    545.45 0.25 578.51 0.25 1123.96

    A.

    B.

    C.

    D.

    E.

    JOINT PROB EXPECTED VALUE NPV = JOINT CF - INITIAL INV


    0.03 74.62 -1013
    0.06 197.07 -216
    0.01 48.79 1379

    0.15 507.02 -120


    0.3 1253.19 677
    0.05 288.58 2272

    0.12 512.76 773


    0.24 1216.84 1570
    0 0.00 486

    EXPECTED CASH FLOW 4098.85


    LESS:INITIAL INVESTMENT -3500
    EXPECTED NPV 598.85
    PROB HAVING A NEGATIVE NPV 24.00%
    MOST LIKELY OUTCOME PROB 24%
    NPV 1570
    JOINT PROB EXPECTED VALLUE NPV = JOINT CF - INITIAL INV
    0.0625 11.36375 -418.18
    0.125 43.3886570247934 -252.89
    0.0625 32.0249070247934 -87.60

    0.125 66.1157024793388 -71.07


    0.25 173.554628099174 94.22
    0.125 107.43847107438 259.51

    0.0625 54.7517820247934 276.03


    0.125 130.16472107438 441.32
    0.0625 70.2476497933884 523.96
    EXPECTED CF 689.050268595041
    (-)INITIAL INV -600
    EXPECTED NPV 89.05

    PROB OF NEGATIVE NPV 37.5%

    BEST CAS SCENARIO NPV OF 523.6


    PROB = 6.25%

    WORST CASE SCENARIO NPV OF 418.2


    PROB = 6.25%

    MOST LIKELY OUTCOME NPV 94.22


    PROB = 25%
    YEAR 1
    Y1 DICOUNY1 PROB.
    893 0.1

    893 0.1
    893 0.1

    1786 0.5
    1786 0.5
    1786 0.5

    2679 0.4
    A) 2679 0.4
    EXPECTED NPV

    YEAR CF DF DISCOUNTED CF Y1 CF Y1 PROB


    1 1000 893 893 0.1
    2000 0.892857 1786 893 0.1
    3000 2679 893 0.1

    2 2000 1594 1786 0.5


    3000 0.797194 2392 1786 0.5
    5000 3986 1786 0.5

    2679 0.4
    2679 0.4
    2679 0.4
    Y2 CF Y2 PROB JOINT CF JOINT PROB EXPECTED VALUE NPV
    1594 0.3 2487 0.03 74.62 -1013
    2392 0.6 3285 0.06 197.07 -215
    3986 0.1 4879 0.01 48.79 1379

    1594 0.3 3380 0.15 507.06 -120


    2392 0.6 4178 0.3 1253.27 678
    3986 0.1 5772 0.05 288.60 2272

    1594 0.3 4273 0.12 512.81 773


    2392 0.6 5071 0.24 1216.94 1571
    3986 0.1 6665 0.04 266.60 3165

    EXPECTED CF 4365.76
    - INITIAL INV -3500
    EXPECTED NPV 865.76

    PROBABILITY OF HAVING NEG NPV 24%


    MOST LIKELY OUTCOME 4%
    6665

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