Question

1)The Gilbert Instrument Corporation is considering a proposed project for its capital budget. The company estimates 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 there is only a 50% 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	-$84 million
Below average	0.20	-26 million
Average	0.50	12 million
Above average	0.20	18 million
Boom	0.05	40 million

What are the project's expected NPV, standard deviation, and coefficient of variation? Enter your answers for the NPV and standard deviation in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Do not round intermediate calculations. Round your answers to two decimal places.

E(NPV)	$ million
?NPV	$ million
CVNPV

2) The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of $350 for 6 years. Its current book value is $2,100, and it can be sold on an Internet auction site for $4,500 at this time. Thus, the annual depreciation expense is $2,100/6=$350 per year. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life.

Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $8,100, and has an estimated useful life of 6 years with an estimated salvage value of $900. This steamer falls into the MACRS 5-years class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new steamer is faster and allows for an output expansion, so sales would rise by $2,000 per year; the new machine's much greater efficiency would reduce operating expenses by $1,500 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. Gilbert's marginal federal-plus-state tax rate is 40%, and the project cost of capital is 14%. Should it replace the old steamer?

The old steamer -Select-shouldshould notItem 1 be replaced.

What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.
$

Answer 1

1.

Expected NPV and standard deviation of NPV is calculated in excel and screen shot provided below:

Expected NPV is $2.20 million and standard deviation of NPV is $26.46 million.

Coefficient of variation = Standard deviation / Expected NPV

= $26.46 / $2.20

= 12.03

Coefficient of variation is 12.03.