Huang Industries is considering a proposed project whose estimated NPV is $12 mi

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 realized that conditions could be better or worse so she performed a scenario analysisss and obtained these results.

Economic Scenario                                       Probability of Outcome               NPV

Recession                                                      0.05                                                 $70 million

Below average                                               0.20                                                  25 million

Average                                                            0.50                                                 12 million

Above average                                                 0.20                                                 20 million

Boom                                                               0.05                                                 30 million

Calculate the project's expected NPV, standard deviation and coefficient of variation

Explanation / Answer

Hi,

Please find the answers as follows:

Expected NPV = .05*(-70) + .20*(-25) + .50*12 + .20*20 + .05*30 = 3 million

Standard Deviation = [.05*(-70 - 3)^2 + .20*(-25-3)^2 + .50*(12-3)^2 + .20*(20-3)^2 + .05*(30-3)^2]^1/2 = 23.622 million

Coeffcient of Variation = Standard Deviation/Expected NPV = 23.622 million/3 million = 7.874

Thanks.

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