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Chapter 6

Question 3

Expected values

A company has to choose between three mutually exclusive projects, the
outcomes of which depend on the state of the economy. The following
estimates have been made:
State of the economy poor good excellent

Probability 0.4 0.5 0.1
Project: NPV ($000) NPV ($000) NPV ($000)

A 150 70 10
B (10) 40 600

C 75 75 125

Determine which project should be selected on the basis of expected NPVs.

EV project A = 150 × 0.4 + 70 × 0.5 + 10 × 0.1 = 96

EV project B = (10) × 0.4 + 40 × 0.5 + 600 × 0.1 = 76

EV project C = 75 × 0.4 + 75 × 0.5 + 125 × 0.1 = 80

Choose project A

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