The Bakers Supply CEO asked the chief financial officer (CFO) to review the proj

Question

The Bakers Supply CEO asked the chief financial officer (CFO) to review the project's data and estimate its stand-alone risk. The CFO revised the figures in Table 1 based on additional information from various departments working on the project

Scenario Probability Projected NPV
Best Case 25% $800,000
Base Case 50% 370,000
Worst Case 25% -270,000

Calculate the expected Standard Deviation of NPV for the project based on the scenarios and new data shown in the table. Round your answer to the nearest whole dollar.

Explanation / Answer

Hi,

Solving for the Standard Deviation would be the same as solving for standard deviation normally (that is, given a probability and a value).
Note that the Standard Deviation is the square root of the variance which is given by the sum of the product of the probability and the difference of the value and the mean. In math terms:

P(xi) (xi - )2 where is the mean.

So for your case, we first get the mean, which is given by:

= (.25 x $800,000) + (.50 x $370,000) + (.25 x -$270,000) = $317,500.

The variance 2 is given by:

2 = [.25 x ($800,000 - $317,500)2] + [.50 x ($370,000 - $317,500)2] + [.25 x (-$270,000 + $317,500)2]

which gives you = $642,555.

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