At Stage 2 of the decision tree it shows that if a project i

At Stage 2 of the decision tree it shows that if a project is successful, the payoff will be $53,000 with a 2/3 chance of occurrence. There is also the 1/3 chance of a -$24,000 payoff. The cost of getting to Stage 2 (1 year out) is $24,000. The cost of capital is 15 percent. What is the NPV of the project at Stage 1? 7.

Solution

Expected Payoff at stage 2 =

-24000*1/3 + 53000*2/3 = -8000+35333.33 = 27533.33$

-57.9713

Here in this Project the NPV is negative so the project is not Acceptable.

Stage		Amount	PVF@15%	PV
1	Cash outflow	-24000	1	-24000
2	Cash Inflow	27533.333	0.870	23942.03
		NPV at stage1	=	-57.9713