ACCA FM · Chapter 9 · Question 3 of 8
A project has the following possible NPVs: -$20,000 with probability 0.3, $40,000 with probability 0.5 and $90,000 with probability 0.2. What is the expected NPV?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) $32,000
Explanation
Expected NPV = (-20,000 x 0.3) + (40,000 x 0.5) + (90,000 x 0.2) = -6,000 + 20,000 + 18,000 = $32,000. The simple average of the three outcomes ($36,667) ignores the probabilities, and treating the loss as positive gives $44,000.
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