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    Expected NPV and standard deviation of NPV with real example

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    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.

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    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.