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17 August, 08:24

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

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  1. 17 August, 08:35
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    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
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