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Is the mean of the NPVs not just their sum divided by seven?

+1 vote
asked Sep 13 in BUS 3024S - Contingencies by anonymous

This is the multistate models tut question 3d.

Is the mean of the NPVs not just their sum (the NPVs from part c) divided by seven? Nowhere does the question mention anything about their expected present value so why do the probabilities come into play?

1 Answer

0 votes
answered Sep 19 by Rowan (2,480 points)

Hi anonymous.

Asking for the mean is synonymous with asking for the expected value of the present value of the cashflows for all possible outcomes. Therefore, to get this answer you sum all the present values for the different outcomes multiplied by the probability of that outcome occurring.