I need help in solving part b of this question a.) Conduct a discounted cash flow calculation to determine the NPV of the following project, assuming a required rate of return of 0.22. The project will cost 75000 USD but will result in inflows of 18,000 USD 25,000 USD 35,000 USD and 50,000 USD in the next 4 years.
B) In part a assume that the inflows are uncertain and normally distributed with std deviations of 1000USD, 1500 USD, 2000 USD and 3000 USD respectively. Find the mean forecast NPV. What is the probability the actual NPV will be positive? Hint: Use monte carlo simulation
I solved part a.) using this NPV = 75,000 + (18000)/((1+0.22)) + (25,000)/((1 + 0.22)^2) + (35,000)/((1 + 0.22)^3) + (50,000)/((1+ 0.22)^4) However, in part b the inflows are not constant and have a normal distribution. How can I calculate the NPV in such cases? Can someone tell me how to proceed
I have a note to your part A of your work. To calculate net present value (NPV), you should insert initial costs 75,000 USD as a negative number. Then you can calculate NPV (in USD):
$NPV_1 = \frac{-75,000}{1.22^0} + \frac{18,000}{1.22^1} + \frac{25,000}{1.22^2} + \frac{35,000}{1.22^3} + \frac{55,000}{1.22^4} = -1,604.65$
If you will consider no amortization of your investment (e.g. you invested to land), then NPV can be calculated:
$NPV_2 = \frac{-75,000}{1.22^0} + \frac{18,000}{1.22^1} + \frac{25,000}{1.22^2} + \frac{35,000}{1.22^3} + \frac{55,000 + 75,000}{1.22^4} = 32,250.29$