PV of uncertain cash flows

PV of uncertain cash flows

. A project with a 3-year life has the following probability distributions for possible end-of-year cash flows in each of the next three years:

Year 1 Year 2 Year 3

Prob Cash Flow Prob Cash Flow Prob Cash Flow

0.30 $300 0.15 $100 0.25 $200

0.40 500 0.35 200 0.75 800

0.30 700 0.35 600

0.15 900

Using an interest rate of 8 percent, find the expected present value of these uncertain cash flows. (Hint: Find the expected cash flow in each year, then evaluate those cash flows.)

Answer: $1,347.61

PV of uncertain cash flows