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 -$44 million     Below average 0.20 -16 million     Average 0.50 12 million     Above average 0.20 24 million     Boom 0.05 32 million    

Explanation / Answer

Answer:

StDev= sqrt 337.4=18.37

CoeffVar= StDev/Mean= 18.37/7=2.624

Economic Probability of NPV ($) in millions Expected NPV ($) in millions Scenario Outcome Recession 0.05 -44 -2.2 Below average 0.2 -16 -3.2 Average 0.5 12 6 Above average 0.2 24 4.8 Boom 0.05 32 1.6 Total 7

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