Question

A construction firm considers whether or not to undertake a project to build a new retail outlet (shopping centre). The construction is to be undertaken in period t = 0. The construction costs are subject to risks (randomness); there is a 50% probability that no major problems will occur in which case the costs are 50 €, and a 50% probability that a major problem emerges in which case the costs are 150 €. The construction firm can sell the outlet to a reliable retail chain for final delivery (and payment) in period t = 1 at a fixed contract price equal to 121 €. The discount rate is 10%.
a. Find the expected net present value of the project.
b. Find the standard deviation of the net present value of the project.
c. What is the probability that the net present value of the project is negative?
d. Discuss whether the construction firm should undertake the project. Bring up arguments in favor and against undertaking the project based on the findings in a)-c).



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  • CreatedAugust 05, 2013
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