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Expected NPV and standard deviation of NPV with real example

The managers of Merton Medical Clinic are analyzing a proposed project. The project's most likely Net Present Value (NPV) is $120,000, but, as evidenced by the following NPV distribution, there is considerable risk involved:

Probability NPV
0.05 $-700,000
0.2 $-250,000
0.5 $120,000
0.2 $200,000
0.05 $300,000

a. What are the project's expected NPV and standard deviation of NPV?
b. Should the base case analysis use the most likely NPV or expected NPV? Explain your answer.

Solution Preview

a. Answer
Expected NPV = - 0.05 *$700,000 - 0.2 *$250,000 + 0.5 *$120,000+ 0.2* $200,000+0.05 *$300,000 ...

Solution Summary

The solution guides you to calculate the expected NPV and standard deviation of NPV. Then more details on expected NPV are analyzed in details.

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