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the coefficient of variation

Huang 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 performed the following scenario analysis:

Economic Probability
Scenario 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?

No excel solution please.

Solution Preview

The expected NPV is
E(NPV)= ∑ Prob*NPV
= 0.05*(-70) + 0.20*(-25) + 0.50*12 + 0.20*20 + 0.05*30 ...

Solution Summary

This job attains the coefficient of variation.

$2.19