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    Calculating Mutually Exclusive Projects

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    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?

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    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 ...

    Solution Summary

    The expert calculates the mutually exclusive projects. The expected NPV for both projects are determined.

    $2.19

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