John, the financial manager of Zenith Ltd, has submitted a proposal for manufacturing a new product, known as Blue. The initial investment for the new project can be estimated at Rs 50,000,000 with certainty.Moreover, the cash inflows for the first three years would have the following distributions:

Year 1	Year 2	Year 3
Cash Flow (Rs)	Probability	Cash Flow (Rs)	Probability	Cash Flow (Rs)	Probability
15,000,000	0.4	20,000,000	0.4	25,000,000	0.3
20,000,000	0.3	25,000,000	0.4	30,000,000	0.5
30,000,000	0.3	30,000,000	0.2	40,000,000	0.2

Only two figures that is the expected net present value and the probability that the net present value would be less than Zero, want to be known by John. He seeks your help in calculating the figures using a discount rate of 10 %.

REQUIRED:
(a) Calculate the Expected Net Present Value and the Standard Deviation of the Net Present Value using the Hillier Model.
(b) Calculate probability that the net present value would be less than Zero.

Answer rating: 100% (QA)

To calculate the Expected Net Present Value ENPV and the Standard Deviation of the Net Present Value SDNPV using the Hillier Model well follow these s... View the full answer