CFAI Afternoon Mock, Question # 110

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!!!