expected NPV, standard deviation, and coefficient of variation
Huang Industries is considering a proposed project whose estimated NPV is $12 million. This estimate assumes that economic conditions will be "average." However, the CFO realizes that conditions could be better or worse, so she performed a scenario analysis and obtained these results:
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
Calculate the project's expected NPV, standard deviation, and coefficient of variation.
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Scenario analysis is a process of analyzing possible future events by considering alternative possible outcomes (scenarios). The analysis is designed to allow improved decision-making by allowing more complete consideration of outcomes and their implications.
If we were to assign probabilities to each one of these scenarios we could calculate the expected NPV. We would consider precisely what economic situations would ...
Solution Summary
This job calculates the problem's expected NPV, standard deviation, and coefficient of variation.
What is the project's expected NPV, its standard deviation, and its coefficient of variation?
Shao Industries is considering a proposed project for its capital budget. The company estimates that 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 that there is only a 50 percent 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 its coefficient of variation?
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