A decision tree shows a 30 percent probability of $2 million in returns and a 70 percent chance of $1 million in returns.What is the maximum you would invest today in this project if the cash in-flow occurs one year in the future and the discount rate is 10 percent?
A) $818,182
B) $1,181,818
C) $1,300,000
D) $1,363,636

Question

Quizplus · Accepted Answer

To calculate the maximum investment amount, we need to calculate the present value of the expected cash flows:

Expected cash inflows = (0.3 x $2,000,000) + (0.7 x $1,000,000) = $1,300,000

Present value of cash inflows = $1,300,000 / (1 + 0.1) = $1,181,818

Therefore, the maximum investment amount would be $1,181,818. Option B is the correct answer.

A Decision Tree Shows a 30 Percent Probability of $2