Question

The first cost, life, and annual benefit for a prospective project are uncertain. Optimistic (OP), most likely (ML), and pessimistic(PS) estimates are given. If the interest rate is 20%, what is the expected NPV?

Parameter	Pessimistic	Most Likely	Optimistic
Fist cost	150000	100000	80000
Annual benefit	25000	45000	50000
Project life	5	7	9

Answer 1

Given :

Parameter	Pessimistic	Most Likely	Optimistic
First cost	150000	100000	80000
Annual benefit	25000	45000	50000
Project life	5	7	9

Now we are calculating the expected parameter :

For first cost we are using PERT :

Where, To = Optimistic Time ,Tm = Most Likely TIme ,Tp = Pessimistic time

Therefore ,

Expected First Cost

Annual Benefits at 20% Interest rate

Project Life

Therefore the value of NPV is :