Hi Mayank..Will try to explain it through an example. Let the initial investment be 30,000, rate of return 10%,project life 3 years & scrap value nil. Option A:cash inflows for 1st year,2nd year & 3rd year be 10,000,Rs13,000 &15,000 respectively. Probability is 0.6. Option B:cash inflows for 1st year,2nd year & 3rd year be 13,000,Rs.17,000 & 21,000 respectively. Probability is 0.4.

**Worst Case**:NPV of option A=-30,000+10,000 x 0.909 + 13,000 x 0.826 + 15,000 x 0.751=1,093. NPV of option B=-30,000+13,000 x 0.909 + 17,000 x 0.826 + 21,000 x 0.751=11,630. Being the lower NPV, option A is the worst case.

**Probability of worst case**

**a)Independent over time:**There is 0.6 probability for the cash inflow to be Rs10,000 in the first year. Since the cash inflow of the 2nd year 13,000 is not affected by the cash inflow of the first year, the probability for the 2nd year shall also be 0.6. Similarily the probability for 3rd year will be 0.6. Hence the probability of worst case when cash flows are independent=0.6.

**b)Perfectly dependent over time:**Here the cash inflows of an year is affected by the cash inflows of the previous year. For example, the cash inflow for 2nd year shall be 13,000 only if the cash inflows of 1st year are Rs10,000. Similarily, the 3rd year cash inflows are 15,000 only when the 1st year & 2nd year cash inflows are 10,000 & 13,000 respectively. When the occurence of 'A' depends upon the occurence of 'B', the probabilty of both 'A' & 'B' happening together will be the probability of 'A' multiplied by probability of 'B'. Thus,the probabilty of occurence of the worst case=0.6 x 0.6 x 0.6=0.216.