Higher standard deviation in cash flows and associated risks

Explain how unexpected national and/or international events can create a higher standard deviation in cash flows and increase the risk associated with long-lived projects. Give examples of events that produced such results.

Solution Preview

Standard Deviation
Variance is the arithmetic mean (average) of the square of the difference between the value of an observation and the arithmetic mean of the value of all observations. It is also referred to as the second moment about the mean. Standard Deviation is the square root of Variance.
Implication on Portfolio Management

Standard deviation essentially reports a security's or fund's volatility, which indicates the tendency of the returns to ...

The XYZ Company has estimated the expected cashflows [in thousands] for 1996 to be as follows:
Probability Cash Flow
10 10
15 140
50 150
15 180
10 210
Calculate:
a

Taussig Technologies is considering two potential projects, X and Y. In assessing the projects' risks, the company estimated the beta of each project versus both the company's other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following numbers: Correl

I am trying to figure out what the standarddeviation for the following is. With after tax cashflows of:
Probability .2 for cash flow $9000
Probability .3 for cash flow $12000
Probability .5 for cash flow $15000
I'm not sure if I need these numbers as well, but the net after tax cost is $10,000, the tax rate is 35%, and

A 4-year project can be purchased for $10,000. Net cash benefits per year have an expected value of $4,000 and a standarddeviation of $2,000. The required rate of return is 10%.
a) Expected NPV of the project.
b) Standarddeviation of NPV assuming perfect correlation of cashflows.
c) Standarddeviation of

From the below solution, tell me what the coefficient of variation implies? And would you accept this project or not? Why?
The expected NPV is
E(NPV)= sigma Prob*NPV
= 0.05*(-70) + 0.20*(-25) + 0.50*12 + 0.20*20 + 0.05*30
= 3 (million)
The variance of NPV is
VAR = sigma Prob*[NPV -E(NPV)]^2
= 0.05*(-70-3)^2 + 0.

1) The XYZ Company has estimated expected cashflows for 1996 to be as follows:
Probability Cash flow
.10 $120,000
.15 140,000
.50 150,000
.15 180,000
.10 210,000
a) Calculate the standarddeviation
b) Calculate the coefficient of variation.

BPC Inc. must decide between two mutually exclusive projects. Each costs $6,750 and has an expected life of 3 years. Annual project cashflows begin 1 year after the initial investment, and are subject to the following probability distributions:
PROJECT A PROJECT B
Probability CashFlows

Projects A and B have the same cost, and both have conventional cashflows. The total cash inflows for A (undiscounted) are $400. The total for B is $360. The IRR for A is 20%; the IRR for B is 18%.
a) What can you deduce about the NPVs for Projects A and B?
b) What do you know about the crossover rate?

A firm is considering two alternative projects. Project A needs an investment of $800,000. Project B needs an investment of $750,000. Relevant annual cash flow data for the two projects over their expected seven-year lives are as follows:
Project A Project B