Telluride Tours is currently evaluating two mutually exclusive investments. Afte

Question

Telluride Tours is currently evaluating two mutually exclusive investments. After doing a scenario analysis and applying probabilities to each scenario, it has determined that the investments have the following distributions around the expected NPV.

Several member 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.

d) Calculate the probability of a negative NPV for both projects.
e) Which project should be projected?

SHOW ALL WORK

Probability NPV-A NPV-B 15%                                  (-34,000)                         (-12,750) 20%                                     (-8,500)                              2,125 30%                                     17,000                           17,000 20%                                     42,500                           31,875 15%                                     68,000                           46,750

Explanation / Answer

d) NPA -A

TOTAL 170000

NEGATIVE NPV = 42500

PROBABILITY = 42500/170000 = 0.25

NPV B

TOTAL NPV = 110500

NEGATIVE NPV = 12750

PROABABILITY = 12750/110500= 0.115

E) NPV B SHOULD BE CHOOSEN AS IN THIS PROBABIILITY OF BEGATIVE NPV IS LESS THEN THE NVP A

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