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 NPV ($58 million) (22 million) 12 million 20 million 34 million Economic Scenario Probability of Outcome 0.05 0.20 0.50 0.20 0.05 Recession Below average Average Above average Boom 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 E(NPV) = $ million million CV

Explanation / Answer

Expected NPV = E(NPV) = 0.05 * (-58) + 0.20 * (-22) + 0.5 * 12 + 0.20 * 20 + 0.05 * 34 = - 2.9 - 4.4 + 6 + 4 + 1.7

= $ 4.4 million

Standard Deviation NPV : First we have to calculate Variance which is square of Standard Deviation

Variance = 3893.76 * 0.05 + 696.96 * 0.20 + 57.76 * 0.50 + 243.36 * 0.20 + 876.16 * 0.05 = 455.44

Standard Deviation = Variance 0.5 = $ 21.34 million

Coffecient of Variation = CV = Standard Deviation /Mean = 21.34 / 4.4 = 4.85

Expected Scenario Probability of Outcome NPV Deviation from Expected Value Squared Recession 0.05 -58 (-58 - 4.4) = -62.4 3893.76 Below Average 0.20 -22 (-22 - 4.4) = -26.4 696.96 Average 0.50 12 12 - 4.4 = 7.6 57.76 Above Average 0.20 20 20 - 4.4 = 15.6 243.36 Boom 0.05 34 34 - 4.4 = 29.6 876.16

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