Homework #6 Problem #2

Probability Distribution of ANB

Project Balance PBn(i)
Sequence N=0 N=1 N=2 ANB Probability
-100 -100 -100*1.1 + 110 0*1.1 + 100 = 100 0.3 * 0.5 = 0.15
110 =0 100
100
-100 -100 -100*1.1 + 110 0*1.1 + 50 = 100 0.3 * 0.5 = 0.15
110 =0 50
50
-100 -100 -100*1.1 - 90 = -200*1.1 + 120 400 0.7 * 0.2 = 0.14
-90 -200 = -100
120
-100 -100 -100*1.1 - 90 = -200*1.1 + 420 300 0.7 * 0.8 = 0.56
-90 -200 = 200
420
Calculation of E(ANB)n, SD(ANB)n and EGCL(ANB)n for n=0, 1, 2

N=0

E(ANB) = ANB * P[ ANB ] ; Var(ANB) = E(ANB2) [E(ANB)]2

E(ANB)0 = 100*0.15 + 100*0.15 + 400*0.14 + 300*0.56 = 254

V(ANB)0 = 1002*0.15 + 1002*0.15 + 4002*0.14 + 3002*0.56 - 2542 = 11,284

SD(ANB)0 = SQRT(11,284) = 106.23

EGCL(ANB)n = E(ANB)n + * SD(ANB)n

EGCL(ANB)0 = E(ANB)0 + * SD(ANB)0 = 254 + 2.5 (106.23) = 519.28

N=1

E(ANB)1,1 = 100*0.5 + 100*0.5 = 100

E(ANB)1,2 = 400*0.2 + 300*0.8 = 320

E(ANB)1 = 100 * 0.3 + 320*0.7 = 254

V(ANB)1,1 = 1002*0.5 + 1002*0.5 - 1002 = 0

V(ANB)1,2 = 4002*0.2 + 3002*0.8 - 3202 = 1600

V(ANB)1= 0 * 0.3 + 1600*0.7 = 1120

SD(ANB)1= SQRT(1120) = 33.47

EGCL (ANB)1 = E(ANB)1 + * SD(ANB)1 = 254 + 2.5*(33.47) = 337.68

N=2

E(ANB)2,1 = 100

E(ANB)2,2 = 100

E(ANB)2,3 = 400

E(ANB)2,4 = 300

E(ANB)2 = 100 * 0.3*0.5 + 100*0.3*0.5 + 400*0.7*0.2 + 300*0.7*0.8 = 254

V(ANB)2= 0 SD(ANB)2= 0

EGCL (ANB)2 = E(ANB)2 + * SD(ANB)1 = 254 + 2.5*(0) = 254

Calculation of AUR and G:
N 2
AUR = EGCL(ANB) n ;
n 0
AUR = EGCL( ANB)
n 0
n ;

AUR = 519.28 + 337.68 + 254 = 1111.26

AUR
G = (C0 = Numerical value of initial investment)
C0

G = 1111.26 / 100 = 11.1126

Calculation of E(NPV) and SD(NPV)

Probability Distribution of NPV

Sequence NPV Probability

-100 -100 + 0.3 * 0.5 = 0.15
110 110(1.1)-1
100 +100(1.1)-2 =
82.64
-100 -100 + 0.3 * 0.5 = 0.15
110 110(1.1)-1
50 +50(1.1)-2 =
41.32
-100 -100 - 90(1.1)-1 0.7 * 0.2 = 0.14
-90 +120(1.1)-2 =
120 -82.64
-100 -100 - 90(1.1)-1 0.7 * 0.8 = 0.56
-90 +420(1.1)-2 =
420 165.29

N
E(NPV) = NPV * P[ NPV] ;
n 0
Var(NPV) = E(NPV2) [E(NPV)]2

E(NPV) = 82.64 * 0.15 + 41.32 * 0.15 82.64 * 0.14 + 165.29*0.56 = 99.59

Var(NPV) = E(NPV2) [E(NPV)]2 = 82.642 * 0.15 + 41.322 * 0.15 +(- 82.64)2 * 0.14 + 165.292*0.56
99.592 = 7618.09
SD(NPV) = 87.28

V = E(NPV) k * SD(NPV);

= 99.59 2.5 (87.28) = -118.61

V
Z =
G

Z = -118.61 / 11.1126 = -10.6735