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.
Solution Preview
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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.