Huang Industries is considering a proposed project whose estimated NPV is $12 mi
ID: 2741264 • Letter: H
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: 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.Explanation / Answer
expected NPV...sum all (probability of scenario * NPV if that scenario)
= 5.3 mil
Working notes for the above answer is as under
Prbabelity
NPV
(A)
(B)
(A*B)
0.05
-86
-4.3
0.2
-14
-2.8
0.5
12
6
0.2
24
4.8
0.05
32
1.6
1
5.3
So NPV = 5.3 Million
(2)
std dev is sq rt of variance
variance = for each economic scenario...(NPV for that scenario - 5.3mil)^2 * probability of that scenario...then sum all
Prbabelity
NPV
NPV of
Project
(A)
(B)
( C)
D = (B-C)
Square
of D
D*A
0.05
-86
5.3
-91.3
8335.69
416.7845
0.2
-14
5.3
-19.3
372.49
74.498
0.5
12
5.3
6.7
44.89
22.445
0.2
24
5.3
18.7
349.69
69.938
0.05
32
5.3
26.7
712.89
35.6445
619.31
= 619.31,... sq rt (std dev)
= 24.8859
3
coeff of variation
= std dev / expected value
= 24.8859 / 5.3
= 4.6395
CV =4.695
Prbabelity
NPV
(A)
(B)
(A*B)
0.05
-86
-4.3
0.2
-14
-2.8
0.5
12
6
0.2
24
4.8
0.05
32
1.6
1
5.3
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