Jen Industries is considering a proposed project whose estimated NPV is $12 mill

Question

Jen 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: Economic Scenario Probability of Outcome NPV Recession 0.05 ($70 million) Below Average 0.20 ($25 million Average 0.50 ($12 million Above Average 0.20 ($20 million Boom 0.05 ($30 million Calculate the projects expected NPV, standard deviation, and coefficient of variation.

Explanation / Answer

probability X P*X (X- Average) (X-average)^2 P*(X-average)^2 event probability NPV Probability*NPV NPV-average NPV recession 0.05 70 3.5 50 2500 125 below average 0.2 25 5 5 25 5 average 0.5 12 6 -8 64 32 above average 0.2 20 4 0 0 0 boom 0.05 30 1.5 10 100 5 Average NPV 20 Variance 167 Standard deviation 12.92 Standard deviation 12.92285 (standard deviation/average)*100 coefficient of variation 64.6 percent

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