NPV, standard deviation, and coefficient of variation
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Shao 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 also performed the following scenario analysis:
Economic Scenario Probability 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?
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Solution Summary
The solution calculates expected NPV, standard deviation, and coefficient of variation of a project whose probability distribution of NPVs is given.
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Shao 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. ...
Purchase this Solution
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