Question

Financial Management

Please use formula and get calculation in detail.

Acme industries is considering a proposed project whose estimated NPV is $12million.This estimate assumes that economic conditions will be average. However, the CFO wanted to do a scenario analysis and obtained the following results:

Economic Situation       Probability NPV

Recession 5% -$70 million

Below Average 20%                     -$20 million

Average 50%                     $12 million

Above Average 20%                     $20 million

Boom 5% $30 million

Calculate the project’s expected NPV, standard deviation, and coefficient of variation. For the standard deviation please use MS Excel.

Answer 1

The expected NPV calculations are shown in the table below:

The expected NPV is $ 4 million

Economic situation	Probability	NPV(in mil)	Prob * NPV(in mil)
Recession	5%	-70	-3.5
Below average	20%	-20	-4
Average	50%	12	6
Above average	20%	20	4
Boom	5%	30	1.5
Total	4

The expected NPV calculations are shown in the table below:

Economic situation	Probability	NPV(in mil)	NPV - expected NPV	(NPV - expected NPV)^2	Prob * (NPV - expected NPV)^2
Recession	5%	-70	-74	5476	273.8
Below average	20%	-20	-24	576	115.2
Average	50%	12	8	64	32
Above average	20%	20	16	256	51.2
Boom	5%	30	26	676	33.8
Total	506

Variance of project = 506

Standard deviation of project = 22.5

Coefficient of variation = Standard dev / mean expected NPV

= 22.5/4

= 5.62