Klott Company encounters significant uncertainty with its sales volume and price
ID: 2648255 • Letter: K
Question
Klott Company encounters significant uncertainty with its sales volume and price in its primary product. The firm uses scenario analysis in order to determine an expected NPV, which it then uses in its budget. The base case, best case, and worse case scenarios and probabilities are provided in the table below. What is Klott's expected NPV, standard deviation of NPV, and coefficient of variation of NPV?
Probability
Unit Sales
Sales
NPV
of Outcome
Volume
Price
(In Thousands)
0.30
6,000
$3,600
-$6,000
0.50
10,000
4,200
+13,000
0.20
13,000
4,400
+28,000
Expected NPV = $35,000; sNPV = 17,500; CVNPV = 2.00.
Expected NPV = $35,000; sNPV = 11,667; CVNPV = 0.33.
Expected NPV = $10,300; sNPV = 12,083; CVNPV = 1.17.
Expected NPV = $13,900; sNPV = 8,476; CVNPV = 0.61.
Expected NPV = $10,300; sNPV = 13,900; CVNPV = 1.35.
Probability
Unit Sales
Sales
NPV
of Outcome
Volume
Price
(In Thousands)
Worst case0.30
6,000
$3,600
-$6,000
Base case0.50
10,000
4,200
+13,000
Best case0.20
13,000
4,400
+28,000
Explanation / Answer
Expected npv = 10,300
To calculate the standard deviation of those numbers:
= square root of (x- xbar)^2/n-1
Coefficient of Variation is expressed as the ratio of standard deviation and mean.
Correct answer is C
Probability cash flow cashflow after probability 0.3 (6,000) (1,800) 0.5 13,000 6,500 0.2 28,000 5,600 Total 10,300Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.