ACCA FM · Chapter 9 · Question 6 of 8
A project costs $70,000 now. The year 1 cash inflow will be $50,000 (probability 0.6) or $30,000 (probability 0.4). Independently, the year 2 cash inflow will be $60,000 (probability 0.7) or $40,000 (probability 0.3). The discount rate is 10% (DFs 0.909 and 0.826). What is the probability that the project will have a negative NPV?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) 12%
Explanation
NPVs of the four combinations: (50,000; 60,000) +25,010; (50,000; 40,000) +8,490; (30,000; 60,000) +6,830; (30,000; 40,000) -9,690. Only the last combination is negative, with joint probability 0.4 x 0.3 = 0.12, i.e. 12%. The other options use single-period probabilities or the wrong combination.
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