Scenario analysis Huang Industries is considering a proposed project whose estim

Question

Scenario analysis

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.

Economic Scenario Probability of Outcome NPV Recession 0.05 - $38 million Below average 0.20 - $16 million Average 0.50 12 million Above average 0.20 22 million Boom 0.05 34 million

Explanation / Answer

1)Standard deviation

$ 7.01 million

Standard deviation :Expected NPV= (Y) =7.01

Standard deviation= Underroot of 301

                          = $17.35 million (APPROX)

Coefficient of variation = Standard deviation / Expected NPV(y)

                                 = 17.35/ 7.01

                               = 2.48

Economic scenario Prob.(a) NPV(b) EXPECTED NPV (a*b) recession .05 -38 -1.90 below average .20 -16 -3.20 average .50 12 6 above average .20 22 4.41 Boom .05 34 1.70 Expected NPV 1

$ 7.01 million

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