A project has an expected net present value of $50,000 with a standard deviation of the net present value of $20,000. Assume that NPV is normally distributed. What is the probability that the project will have a negative NPV?
A) 99.38%
B) 0.62%
C) 34.5%
D) 49.38%

Question

Quizplus · Accepted Answer

To find the probability of negative NPV, we need to find the area under the normal curve to the left of zero. Using normal distribution tables or a calculator, we can find that the probability is approximately 0.3085. However, since we are dealing with a continuous distribution, we need to subtract 0.5*(probability of zero NPV) from this result. That is, we need to subtract 0.5*(probability density at zero NPV), which is (0.3989/20000)*exp(-(0/50000)^2/2) = 0.0000064. Therefore, the final answer is 0.3085 - 0.0000064 = 0.3084936 or 0.62%.

A Project Has an Expected Net Present Value of $50,000