How to calculate the NPV and the standard deviation of NPV

A project requires an immediate cash outflow of £400,000 in return for the following three probable cash flows:

Recession - 0.3 (probability), £100,000 (End of yr 1), £150,000 (" Yr 2)
Growth - 0.5 (probability), £300,000 (End of yr 1), £350,000 (" yr 2)
Boom - 0.2 (Probability), £500,000 (End of yr 1), £550,000 (" yr 2)

The risk-adjusted discount rate is 8 percent for both years

Calculate:
(i) The expected NPV
(ii) The standard deviation of NPV.
(iii) The probability of NPV being less than zero assuming a normal distribution of return.
(iv) What do your answers tell you.
James_d180
Asked Apr 17, 2013
Edited Apr 17, 2013

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