Calculating Mutually Exclusive Projects Trail Guides, Inc., is currently evaluat

Question

Calculating Mutually Exclusive Projects

Trail Guides, Inc., is currently evaluating two mutually exclusive investment. After doing a scenario analysis and applying probabilities to each scenario, they have determine that the investments have the following distributions around the expected NPVs.

Profitability NPV A NPV B
15% -$40,000 -$15,000
20% -10,000 2,500
30% 20,000 20,000
20% 50,000 37,500
15% 80,000 55,000

Several members of the management team have suggested that Project A should be selected because it has a higher potential NPV. Other members have suggested that Project B appears to be more conservative and should be selected. They have asked you to resolve this question.

a. Calculate the expected NPV for both projects. Can the question be resolved with this information alone?
b. Calculate the variance and standard deviation of the NPVs for both projects. Which project appears to be riskier?
c. Calculate the coefficient of variation for both projects. Does this change your opinion from part b?
d. Calculate the probability of a negative NPV for both projects.
e. Which project should be accepted?

Can I get the solutions in Excel Format?

Explanation / Answer

Answer:

a -

b:

Project A appears to be riskier because its SD is higher

C:

1.106797181

No, this doesn't change our opinion ( coefficient of variation is higher in Project A)

e:

Project B should be accepted

Profitability NPV A NPV B Expected NPV A Expected NPV B 15% -40,000 -15,000 -6000 -2250 20% -10,000 2,500 -2000 500 30% 20,000 20,000 6000 6000 20% 50,000 37,500 10000 7500 15% 80,000 55,000 12000 8250 20000 20000

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