For two mutually exclusive investments, the management of the company has developed cash flow estimates as pessimistic, most likely, and optimistic.
A B
Investment 5,500 5,500
Pessimistic 200 700
Most likely 800 800
Optimistic 1,400 900
Both projects have a life of 15 years. Cost of capital = 14 percent. Which project is more risky? Recalculate NPV if the probabilities of the three situations are 30 percent, 50 percent and 20 percent respectively.