Environ Ltd has gathered the following information regarding the probable costs of two alternative projects designed to recycle effluent which is environmentally sensitive. One of the projects must be accepted in accordance with legislation relating to environmental pollution. The possible net cash flows have all been discounted at 16% but are heavily dependent upon factors that cannot be predicted with certainty. However, probabilities of occurrence have been established.
| Project A — Liquid Disposal | |
| Net cash flows (PV) (N$) | Probability |
| (150) | 20% |
| (85) | 50% |
| (10) | 10% |
| 50 | 20% |
| Project B — Solid Disposal | |
| Net cash flows (PV) (N$) | Probability |
| (120) | 30% |
| (40) | 40% |
| 0 | 20% |
| 50 | 10% |
| REQUIRED | MARKS | |
| a) | Determine the expected present value (or cost) of each of the two projects | 4 |
| Using the mean-variance analysis, and the assumption of continuous probabilities, recommend which project should be accepted | 16 |
1 Answer