Along with the sensitivity analysis, Danielle is including a scenario analysis f

Question

Along with the sensitivity analysis, Danielle is including a scenario analysis for the project in her report, giving the probability of the project generating a negative NPV. Her report includes the following information about the scenario analysiS: Data Collected Probability Data for z Probability (Pj) 0.35 0.30 0.35 0.03 0.06 Outcome Pessimistic Most likely Optimistic NPVj -$5.62 million $7.94 million $16.45 million 0.4 0.6 0.8 1.0 0.09 0.3336 0.3228 0.3121 0.2643 0.2546 0.2451 0.1867 0.1515 0.1446 0.1379 0.2033 0.1949 Complete the missing information in Danielle's report: The expected net present value of the project is $6.17 million million. Standard deviation of the net present value (the NPV of the project is likely to vary by) Assuming that probability distribution is normal, the value of z is Thus, the project has a chance to generate an NPV of less than $0.

Explanation / Answer

Expected NPV=0.35*(-5.62)+0.3*(7.94)+0.35*16.45=6.1725 million

Standard deviaiton=sqrt(0.35*(-5.62-6.1725)^2+0.3*(7.94-6.1725)^2+0.35*(16.45-6.1725)^2)=9.30477 million

Z=(0-6.1725)/9.30477=-0.663369

Pr(NPV<0)=Pr(Z<-0.663369)
From the table we see the value corresponding to 0.6 in row and 0.06 in column, we get 0.2546

So, the project has 25.46% chance to generate an NPV of less than $0

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