Huang Industries is considering a proposed project whose estimated NPV is $12 mi

Question

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 ($48 million) Below average 0.20 (16 million) Average 0.50 12 million Above average 0.20 24 million Boom 0.05 28 million

Explanation / Answer

1)

Expected ( NPV ) = 0.05 * (-48) + 0.2 * (-16) + 0.5 * 12 + 0.2 * 24 + 0.05 * 28

Expected ( NPV ) = -2.4 - 3.2 + 6 + 4.8 + 1.4

Expected ( NPV ) = 6.6 million

2)

standard deviation ( NPV ) = [0.05 ( -48 - 6.6)2 + 0.2 ( -16 - 6.6)2 + 0.5 ( 12 - 6.6)2 + 0.2 ( 24 - 6.6)2 + 0.05 ( 28 - 6.6)2]1/2

standard deviation ( NPV ) = [ 149.058 + 102.152 + 14.58 + 60.552 + 22.898 ]1/2

standard deviation ( NPV ) = [ 349.24 ]1/2

standard deviation ( NPV ) = 18.69 million

3)

Coefficient of variation = standard deviation / mean

Coefficient of variation = 18.69 / 6.6

Coefficient of variation = 2.83

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