T opsider encounters significant uncertainty with its sales volume and price in
ID: 2698667 • Letter: T
Question
Topsider 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 worst case scenarios and probabilities are provided in the table below.
Probability Unit Sales Sales NPV
of Outcome Volume Price (In thousands)
Worst case 0.30 6,000 $3,600 $ -6,000
Base case 0.50 10,000 4,200 13,000
Best case 0.20 13,000 4,400 28,000
a. What is the standard deviation of the product’s NPV, s(NPV)?
b. What is the (cumulative) probability of a positive NPV for this product?
Explanation / Answer
Expected NPV = $10,300; σ
NPV = 12,083; CVNPV = 1.17
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