The managers of Merton Medical Clinic are analyzing a proposed project. The proj

Question

The managers of Merton Medical Clinic are analyzing a proposed project. The project's most likely
NPV is $120,000, but, as evidenced by the following NPV distribution, there is considerable risk
involved:

Probability NPV
0.05 -$700,000
0.2 -$250,000
0.5 $120,000
0.2 $200,000
0.05 $300,000

a.) What are the project's expected NPV and standard deviation of NPV? (show your work)

b.) Compute the CV? (show your work)

c.) Should the base case analysis use the most likely NPV or expected NPV? Explain your answer.

Please explain your answer and show your work so I can understand this. Thanks!

Explanation / Answer

Here the Expected (-700,000)*.05 +(-250,000)*.2 + .5*120,000+ .2*200,000+.05*300,000= 30,000. Standard deviation (-700,000-30,000)^2 *.05 +(-250,000-30,000)^2*.2 +(120,000-30,000)^2* .5 +(200,000-30,000)^2*.2 +(300,000-30,000)^2*.05= 236,220 Base case should be most likely. Expected value is what you will get over many outcomes. This will be only one outcome so most likely makes the most sense.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.