Itsoseng NGO is evaluating a two-year project that has the following probability distribution of returns: The events in each year are independent of other years (that is, there are no conditional probabilities).
An outlay of R15 000 is payable at Time 0 and the other cash flows are receivable at the year ends. The risk-adjusted discount rate is 11 per cent.
| Year 1 |
|
Year 2 |
|
|
| Return |
Probability |
Return |
Probability |
|
| 8 000 |
0.1 |
4 000 |
0.3 |
|
| 10 000 |
0.6 |
8 000 |
0.7 |
|
| 12 000 |
0.3 |
|
|
|
Calculate:
1.1. The expected NPV.
1.2. The standard deviation of NPV.
1.3. The probability of the NPV being less than zero assuming a normal distribution of return - (bell shaped and symmetrical about the mean).
1.4. Interpret the figure calculated in (1.3 above).