In the answer, it says "Subtracting the NPV of failure, -1,000*(1-.2688)… Does anyone know where that -1,000 came from? Thanks!
From what I remember… Isn’t the -1000 the initial outlay? NPV Failure = -1000 NPV Success = -1000 + PV’d all CF’s.
The initial outlay was $1mm. That’s what threw me off. Maybe it’s a typo or something.
It probably is… I remember there being a number like that. But your NPV Failure = Initial Outlay * (1-prob of success). If that gets you the right answer, then it is a typo
I hate to do this, but can someone walk me through this: An initial investment of $1mm in a project is expected to pay $10mm at the end of 5 years if it is successful. The probabilities of failure for the project are: Year 1: .3 Year 2: .25 Year 3: .2 Year 4: .2 Year 5: .2 If the cost of capital for the project is 18%, the project’s NPV is…? The answer is $174,950 but how do you get that (using the calculator)?
You take prob of failure * -1M outlay You take prob of Success * NPV of project (CFo = -1M and CF5=10M) Add those two together.
Got it, thanks!!!