Question

Huang Industries is considering a proposed project whose estimated NPV is $12 million. This estimate assumes that economic conditions will be "average." However, the CFO realizes that conditions could be better or worse, so she performed a scenario analysis and obtained these results:

Economic Scenario |
Probability of Outcome |
NPV |

Recession | 0.05 | ($42 million) |

Below average | 0.20 | (20 million) |

Average | 0.50 | 12 million |

Above average | 0.20 | 20 million |

Boom | 0.05 | 26 million |

Calculate the project's expected NPV, standard deviation, and coefficient of variation. Round your answers to two decimal places. Enter your answers for the project's expected NPV and standard deviation in millions. For example, an answer of $13,000,000 should be entered as 13.

E(NPV) | = $ _____ million |

σ_{NPV} |
= $ _____ million |

CV | = |

Answer #1

E(NPV) |
$5.20 Million |

σ |
$18.08 Million |

CV |
3.48 |

**Project's expected NPV -
E(NPV)**

E(NPV) = Sum[NPV x Probability of Outcome]

= Sum[(-$42 x 0.05) + (-$20 x 0.20) + ($12 x 0.50) + ($20 x 0.20) + ($26 x 0.05)]

= -$2.10 - $4.00 + $6.00 + $4.00 + $1.30

= $5.20 Million

“E(NPV) = $5.20 Million”

**Projects Standard Deviation -
σNPV**

σNPV = √[{0.05(-42 –
5.20)^{2}} + {0.20(-20 – 5.20)^{2}} + {0.50(12 –
5.20)^{2}} + {0.20(20 – 5.20)^{2}} + {0.05(26 –
5.20)^{2}}]

= √[99.12 + 100.82 + 40.80 + 59.20 + 27.04]

= √326.96

= $18.08 Million

“σNPV = $18.08 Million”

**Coefficient of Variation -
CV**

CV = σNPV / E(NPV)

= $18.08 Million / $5.20 Million

= 3.48

“CV = 3.48”

Huang Industries is considering a proposed project whose
estimated NPV is $12 million. This estimate assumes that economic
conditions will be "average." However, the CFO realizes that
conditions could be better or worse, so she performed a scenario
analysis and obtained these results:
Economic Scenario Probability of Outcome
NPV
Recession 0.05 ($90 million)
Below average 0.20 (24 million)
Average 0.50 12 million
Above average 0.20 14 million
Boom 0.05 40 million
Calculate the project's expected NPV, standard
deviation, and coefficient...

Huang Industries is considering a proposed project whose
estimated NPV is $12 million. This estimate assumes that economic
conditions will be "average." However, the CFO realizes that
conditions could be better or worse, so she performed a scenario
analysis and obtained these results:
Economic Scenario Probability of Outcome
NPV
Recession 0.05 ($42 million)
Below average 0.20 (24 million)
Average 0.50 12 million
Above average 0.20 14 million
Boom 0.05 38 million
Calculate the project's expected NPV, standard deviation, and
coefficient...

Huang Industries is considering a proposed project whose
estimated NPV is $12 million. This estimate assumes that economic
conditions will be "average." However, the CFO realizes that
conditions could be better or worse, so she performed a scenario
analysis and obtained these results:
Economic Scenario
Probability of Outcome
NPV
Recession
0.05
($34 million)
Below average
0.20
(16 million)
Average
0.50
12 million
Above average
0.20
16 million
Boom
0.05
38 million
Calculate the project's expected NPV, standard deviation, and
coefficient...

Huang Industries is considering a proposed project whose
estimated NPV is $12 million. This estimate assumes that economic
conditions will be "average." However, the CFO realizes that
conditions could be better or worse, so she performed a scenario
analysis and obtained these results:
Economic Scenario
Probability of Outcome
NPV
Recession
0.05
($48 million)
Below average
0.20
(16 million)
Average
0.50
12 million
Above average
0.20
22 million
Boom
0.05
28 million
Calculate the project's expected NPV, standard deviation, and
coefficient...

Huang Industries is considering a proposed project whose
estimated NPV is $12 million. This estimate assumes that economic
conditions will be "average." However, the CFO realizes that
conditions could be better or worse, so she performed a scenario
analysis and obtained these results:
Economic Scenario
Probability of Outcome
NPV
Recession
0.05
($38 million)
Below average
0.20
(16 million)
Average
0.50
12 million
Above average
0.20
24 million
Boom
0.05
40 million
Calculate the project's expected NPV, standard deviation, and
coefficient...

Huang Industries is considering a proposed project whose
estimated NPV is $12 million. This estimate assumes that economic
conditions will be "average." However, the CFO realizes that
conditions could be better or worse, so she performed a scenario
analysis and obtained these results:
Economic Scenario
Probability of Outcome
NPV
Recession
0.05
($78 million)
Below average
0.20
(22 million)
Average
0.50
12 million
Above average
0.20
24 million
Boom
0.05
32 million
Calculate the project's expected NPV, standard deviation, and
coefficient...

Huang Industries is considering a proposed project whose
estimated NPV is $12 million. This estimate assumes that economic
conditions will be "average." However, the CFO realizes that
conditions could be better or worse, so she performed a scenario
analysis and obtained these results:
Economic Scenario
Probability of Outcome
NPV
Recession
0.05
($30 million)
Below average
0.20
(18 million)
Average
0.50
12 million
Above average
0.20
14 million
Boom
0.05
36 million
Calculate the project's expected NPV, standard deviation, and
coefficient...

Huang Industries is considering a proposed project whose
estimated NPV is $12 million. This estimate assumes that economic
conditions will be "average." However, the CFO realizes that
conditions could be better or worse, so she performed a scenario
analysis and obtained these results:
Economic Scenario
Probability of Outcome
NPV
Recession
0.05
($86 million)
Below average
0.20
(28 million)
Average
0.50
12 million
Above average
0.20
14 million
Boom
0.05
34 million
Calculate the project's expected NPV, standard deviation, and
coefficient...

Huang Industries is considering a proposed project whose
estimated NPV is $12 million. This estimate assumes that economic
conditions will be "average." However, the CFO realizes that
conditions could be better or worse, so she performed a scenario
analysis and obtained these results:
Economic Scenario
Probability of Outcome
NPV
Recession
0.05
($42 million)
Below average
0.20
(26 million)
Average
0.50
12 million
Above average
0.20
24 million
Boom
0.05
34 million
Calculate the project's expected NPV, standard deviation, and
coefficient...

Huang Industries is considering a proposed project whose
estimated NPV is $12 million. This estimate assumes that economic
conditions will be "average." However, the CFO realizes that
conditions could be better or worse, so she performed a scenario
analysis and obtained these results:
Economic Scenario
Probability of Outcome
NPV
Recession
0.05
($46 million)
Below average
0.20
(26 million)
Average
0.50
12 million
Above average
0.20
14 million
Boom
0.05
32 million
Calculate the project's expected NPV, standard deviation, and
coefficient...

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