Question

A recently introduced computer game has the following probability distributions of expected present worth returns and expected standard deviations.

Probability	Net Present Worth	Standard Deviation
10%	($130,000)	$20,000
20%	($10,000)	$2,000
30%	$170,500	$15,000
20%	$290,000	$30,000
10%	$325,000	$20,000

a. What is the expected present worth for this computer game?

b. What is the expected standard deviation of this investment?

c. What is the probability that this investment will be profitable?

d. Would you recommend that management invest in this project and why or why not?

Answer 1

(a) Calculation of expected present worth

Net present worth Probability Expected present worth

($130000) 10℅ ($13000)

($10000) 20℅ ($2000)

$170500 30℅ $51150

$290000 20℅ $58000

$325000 10℅ $32500

Expected net present worth $126650

(b) Calculation of Expected standard deviation

Standard deviation probability Expected Sd

$20000 10℅ $2000

$2000 20℅ $ 400

$15000 30℅ $4500

$30000 20℅ $6000

$20000 10℅   $2000  

$14900​​  

(c)  Calculation of probability of positive NPV

(d) Management should invest in this project because it is profitable i.e. $126650