Capital Budgeting: Expected NPV & Coefficient of Variation
Scenario Analysis. Shao Industries is considering a proposed project for its capital budget. The company estimates the project's NPV is $12 million. This estimate assumes that the economy and market conditions will be average over the next few years. The company's CFO, however, forecasts there is only a 50% chance that the economy will be average. Recognizing this uncertainty, she has also performed the following scenario analysis:
Economic Scenario Probability of Outcome NPV
Recession 0.05 ($70 million)
Below average 0.20 (25 million)
Average 0.50 12 million
Above average 0.20 20 million
Boom 0.05 30 million
What is the project's expected NPV, its standard deviation, and coefficient of variation?
Solution Summary
The solution provides step by step method for the calculation of expected NPV, standard deviation, and coefficient of variation of a project. Formula for the calculation is also included.