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:
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.
Expected NPV = - 0.05 *$700,000 - 0.2 *$250,000 + 0.5 *$120,000+ 0.2* $200,000+0.05 *$300,000 ...
The solution guides you to calculate the expected NPV and standard deviation of NPV. Then more details on expected NPV are analyzed in details.