Star has a cost of capital of 12 per cent and is evaluating a project with an initial investment of £375,000. The estimated net cash flows of the project under different economic circumstances and their respective probabilities are as follows:

 

If economic conditions in Year 2 are not dependent on economic conditions in Year 1, what is the expected value of the project’s NPV? What is the risk that the NPV will be negative?

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Net cash flows for Year 1 Economic conditions Weak Moderate Good Net cash flows for Year 2 Economic conditions Moderate Good Probability 0.2 0.5 0.3 Probability 0.7 0.3 Cash flow (£) 100,000 200,000 300,000 Cash flow (£) 250,000 350,000