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 standard deviation?

Economic Scenario Probability of Outcome NPV (millions) Recession 0.1 ($60) Below average 0.15 ($25) Average 0.5 $15 Above average 0.2 $25 Boom 0.05 $32

Explanation / Answer

$26.90

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