Shao Industries is considering a proposed project for its capital budget. The co

Question

Shao Industries is considering a proposed project for its capital budget. The company estimates the project's NPV is $12 million. This estimate assumes that the economy and market conditions will be average over the next few years. The company's CFO, however, forecasts there is only a 50% chance that the economy will be average. Recognizing this uncertainty, she has also performed the following scenario analysis:

What is the project's expected NPV, its standard deviation, and its coefficient of variation? Enter your answers for the NPV and standard deviation in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.

Economic
Scenario Probability of
Outcome
NPV Recession 0.05 -$84 million     Below average 0.20 -20 million     Average 0.50 12 million     Above average 0.20 14 million     Boom 0.05 28 million    

Explanation / Answer

Answer:

Probability NPV 0.05 -84 0.2 -20 0.5 12 0.2 14 0.05 28 ENPV 2 million Standard deviation Sqrt((-84-3)^2*0.05) - (-20-2)^2 * 0.2 + (12-2)^2 *0.5 + (14-2)^2 *0.2 + (28-2)^2 * 0.05) 24.07 Coefficiecnt 24.07 / 2 = 12.03

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