## Answers

- Initial cost= $20 million

Expected cash flow = $3 million

Tenor = 20 years

Net Present Value = Total Cash Inflows PV from Investments – Cost of Investments

So we need to find the present value of the 20 years cash flow

Present Value of periodic payment= P* (1- (1+r)^-n)/r

P = 3 million

R= 13%

N= 20

PV= 3(1-(1+0.13)^-20)/ 0.13

= 3*0.913/0.13

= 21.074

So NPV= 21.074-20

= 1.07 million

- In case of probability, we need to find the adjusted cash flow.

probability | cash flow | adjusted cash flow ( probability * cash flow) |

0.5 | 1.8 | 0.90 |

0.5 | 4.2 | 2.10 |

total | 3.00 |

So the adjusted cash flow $3 million per year

Present Value of periodic payment= P* (1- (1+r)^-n)/r

P = 3 million

R= 13%

N= 19

PV= 3(1-(1+0.13)^-20)/ 0.13

= 3*0.913/0.13

= 21.074

But the value of PV is at the end of 1 yr , we need to find the PV of today

PV= Future Value / (1 + interest rate%)^n

PV= 21.074/(1.13)

= 18.65

So NPV= 18.65-20

= -1.35 million.

As we can see that if they wait for 1 yr the NPV turns negative.

So it is not a good decision to wait and they should invest toady.

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