| Cash flow |
Probability | Probability-
adjusted cash flow | Discount
factor 6% | Present value |
Year 1
Adjustment to reflect risk premium. |
$8,000 $10,000 | 0.10
0.90 | $ 800 9,000
$9,800 (1,400)
$8,400 | 0.943 | $7,921 |
Year 2
| $7,000 $10,000 |
0.15 0.85 | $1,050
8,500 $9,550 | 0.890
| $8,500 | Year 3 |
$7,000 $10,000 | 0.20
0.80 | $1,400 8,000
$9,400 | 0.840 | $7,896
| Year
4 | $6,500 $10,000
| 0.23 0.77 | $1,495
7,700 $9,195 |
0.792 | $7,282 | Year 5 |
$6,000 $10,000 | 0.25
0.75 | $1,500 7,500
$9,000 | 0.747 | $6,723
| Year
6 | $ 5,000
$10,000 | 0.30 0.70 |
$ 1,500 7,000 $ 8,500
| 0.705 | $ 5,992 |
Total
| |
| $54,045
| |
$44,314 |
|
|