Consider an investment with uncertain cash flows. The initial cost of the investment is $84,000 in year
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Question:
Consider an investment with uncertain cash flows. The initial cost of the investment is $84,000 in year zero. You estimate three scenarios for the following five years:
- Most likely case: The project will generate $30,500 in year 1 and it will increase by $750 each year until year 5.
- Optimistic case: The project will generate $41,000 in year 1 and it will increase by 4% each year until year 5.
- Pessimistic case: The project will generate $25,000 in year 1 and it will decrease by 5% each year until year 5.
- Using properties of Beta distribution, calculate expected value and variance for each year's cash flows (for n=1,2,3,4,5).
- Assuming that periodical cash flows are independent, determine the expected value and the standard deviation of the present worth for this investment using a yearly interest rate of 22% compounded annually.
Related Book For
Cost Benefit Analysis Concepts and Practice
ISBN: 978-0137002696
4th edition
Authors: Anthony Boardman, David Greenberg, Aidan Vining, David Weimer
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