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the coefficient of variation

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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.

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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
See Also This Related BrainMass Solution

Coefficient of variation, NPV, Normal Distribution

I need help with solving the attached problems numbers 2, 6, 9, and 17 only.

(See attached file for full problem description)
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Chapter 11

2. Monarck King Size Beds, Inc., is evaluating a new promotional campaign that could increase sales. Possible outcomes and probabilities of the outcomes are shown below. Compute the coefficient of variation.
Additional
Possible Outcomes Sales in Units Probabilities
Ineffective campaign . . . . . . . . 20 .20
Normal response . . . . . . . . . . . 30 .50
Extremely effective . . . . . . . . . 70 .30

5. Five investment alternatives have the following returns and standard deviations
of returns.
Returns- Standard
Alternative Expected Value Deviation
A. . . . . . . . . . . $ 5,000 $1,200
B. . . . . . . . . . . 4,000 600
C. . . . . . . . . . . 4,000 800
D. . . . . . . . . . . 8,000 3,200
E. . . . . . . . . . . 10,000 900
Using the coefficient of variation, rank the five alternatives from lowest risk to highest risk

6. In problem 5, if you were to choose between Alternatives B and C only, would you need to use the coefficient of variation? Why?

9. Waste Industries is evaluating a $70,000 project with the following cash flows.
Year Cash Flows
1 . . . . . . . . . . . . . $11,000
2 . . . . . . . . . . . . . 16,000
3 . . . . . . . . . . . . . 21,000
4 . . . . . . . . . . . . . 24,000
5 . . . . . . . . . . . . . 30,000
The coefficient of variation for the project is .847.
Based on the following table of risk-adjusted discount rates, should the project be undertaken? Select the appropriate discount rate and then compute the net present value.
Coefficient Discount
of Variation Rate
0-.25 . . . . . . . . 6%
.26-.50 . . . . . . . . 8
.51-.75 . . . . . . . . 10
. 76-1.00 . . . . . . . 14
1.01-1.25 . . . . . . . 20

17. When returns from a project can be assumed to be normally distributed, such as those shown in Figure 13-6 (represented by a symmetrical, bell-shaped curve), the areas under the curve can be determined from statistical tables based on standard deviations. For example, 68.26 percent of the distribution will fall within one standard deviation of the expected value (D 1_). Similarly 95.44 (Please see attached file for complete description)
a) What is the probability that the outcome would be between $32,000 and $48,000?
b) What is the probability that the outcome would be between $28,000 and $52,000?
c) What is the probability that the outcome would be greater than $32,000 ?
d) What is the probability that the outcome would be less than $55,680?
e) What is the probability that the outcome would be less than $32,000 or greater than $52,000?

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