HOME WORK SET # 7

1) Consider two projects A and B. Each project requires an initial investment of $ 10000.00.
The annual cash flow of each project is $ 3000.00. The lives of these projects are random
variables with the following probability distributions:

A B
n P[N=n] n P[N=n]
4 0.2 3 0.10
5 0.4 4 0.20
6 0.4 5 0.30
6 0.20
7 0.20

Find the E[NPV] and Var[NPV] of these projects and select the 'best' project using MARR =
10%.

2) The investor has to choose between two projects A and B. Both require an initial
investment of $ 100,000 and have annual cash flow of $ 30,000. The lives of these projects are
random variables with the following probability distributions.
A B
n P[N=n] n P[N=n]
3 0.1 3 0.20
4 0.4 4 0.30
5 0.5 5 0.30
6 0.20
Find the E[NPV] and Var[NPV] of these projects and select the 'best' project using MARR =
10%.

3) Projects A and B have the following cashflows, which are random variables. The life of the
projects are also a random variables, the probability distributions of which are given below.
Find the expected value and the standard deviation of the Net Present Value of the projects
and compare them, using MARR= 10%.
A
n E(Cn) Var(Cn) P(N=n)
0 -10000 0 0.0
1 10000 40000 0.3
2 10000 90000 0.4
3 10000 160000 0.3

B
n E(Cn) Var(Cn) P(N=n)
0 -15000 0 0.0
1 12000 60000 0.3
2 15000 75000 0.5
3 30000 100000 0.2
4) Projects A and B have the following cashflows, which are random variables. The life of the
projects are also a random variables, the probability distributions of which are given below.
Find the expected value and the standard deviation of the Net Present Value of the projects
and compare them, using MARR= 10%.
A
n E(Cn) Var(Cn) P(N=n)
0 -25000 0 0.0
1 15000 62500 0.1
2 15000 90000 0.4
3 15000 122500 0.5

B
n E(Cn) Var(Cn) P(N=n)
0 -30000 0 0.0
1 10000 60000 0.2
2 15000 75000 0.3
3 30000 100000 0.5