Calculating Mutually Exclusive Projects
Not what you're looking for?
Trail Guides, Inc., is currently evaluating two mutually exclusive investment. After doing a scenario analysis and applying probabilities to each scenario, they have determine that the investments have the following distributions around the expected NPVs.
Profitability NPV A NPV B
15% -$40,000 -$15,000
20% -10,000 2,500
30% 20,000 20,000
20% 50,000 37,500
15% 80,000 55,000
Several members of the management team have suggested that Project A should be selected because it has a higher potential NPV. Other members have suggested that Project B appears to be more conservative and should be selected. They have asked you to resolve this question.
a. Calculate the expected NPV for both projects. Can the question be resolved with this information alone?
b. Calculate the variance and standard deviation of the NPVs for both projects. Which project appears to be riskier?
c. Calculate the coefficient of variation for both projects. Does this change your opinion from part b?
d. Calculate the probability of a negative NPV for both projects.
e. Which project should be accepted?
Purchase this Solution
Solution Summary
The expert calculates the mutually exclusive projects. The expected NPV for both projects are determined.
Solution Preview
Trail Guides, Inc., is currently evaluating two mutually exclusive investment. After doing a scenario analysis and applying probabilities to each scenario, they have determine that the investments have the following distributions around the expected NPVs.
Profitability NPV A NPV B
15% -$40,000 -$15,000
20% -10,000 2,500
30% 20,000 20,000
20% 50,000 37,500
15% 80,000 55,000
Several members of the management team have suggested that Project A should be selected ...
Education
- BSc , Wuhan Univ. China
- MA, Shandong Univ.
Recent Feedback
- "Your solution, looks excellent. I recognize things from previous chapters. I have seen the standard deviation formula you used to get 5.154. I do understand the Central Limit Theorem needs the sample size (n) to be greater than 30, we have 100. I do understand the sample mean(s) of the population will follow a normal distribution, and that CLT states the sample mean of population is the population (mean), we have 143.74. But when and WHY do we use the standard deviation formula where you got 5.154. WHEN & Why use standard deviation of the sample mean. I don't understand, why don't we simply use the "100" I understand that standard deviation is the square root of variance. I do understand that the variance is the square of the differences of each sample data value minus the mean. But somehow, why not use 100, why use standard deviation of sample mean? Please help explain."
- "excellent work"
- "Thank you so much for all of your help!!! I will be posting another assignment. Please let me know (once posted), if the credits I'm offering is enough or you ! Thanks again!"
- "Thank you"
- "Thank you very much for your valuable time and assistance!"
Purchase this Solution
Free BrainMass Quizzes
Situational Leadership
This quiz will help you better understand Situational Leadership and its theories.
Business Processes
This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.
Accounting: Statement of Cash flows
This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.
Production and cost theory
Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.
Six Sigma for Process Improvement
A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.