Q. Evlaute Expected value of sales volume?
(17500 × 0·3) + (20000 × 0·6) + (22500 × 0·1) = 19500 units
Expected NPV = (((19500 × 1·35) - 10000) × 3·605) - 50000 = $8852
While the expected net present value is positive the project appears to be acceptable. From earlier examination we know that the NPV is positive at 20000 per year and the NPV will therefore as well be positive at 22500 units per year. The NPV of the nastiest case is
(((17500 × 1·35) - 10000) × 3·605) - 50000 = ($882)
The NPV of the finest case is
(((22500 × 1·35) - 10000) × 3·605) - 50000 = $23452
There is therefore a 30% chance that the project will produce a negative NPV a fact not revealed by considering the expected net present value alone. The expected net present value isn't a value that is likely to take place in practice it is perhaps more useful to know that there is a 30% chance that the project will produce a negative NPV (or a 70% chance of a positive NPV) since this may perhaps represent an unacceptable level of risk as far as the managers of Umunat plc are concerned. It can thus be argued that assigning probabilities to expected economic states or sales volumes has produced useful information that is able to help the managers of Umunat to make better investment decisions. The complexity with this approach is that probability estimates of project variables or future economic states are probable to carry a high degree of uncertainty and subjectivity.