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: Economic Scenario Probability of Outcome NPV 0.05 0.20 0.50 0.20 0.05 ($32 million) (18 million) 12 million 24 million 28 million 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

1.Expected NPV=Respective NPV*Respective probability

=(-32*0.05)+(-18*0.2)+(12*0.5)+(24*0.2)+(28*0.05)

=$7 million

2.

Standard deviation=[Total  probability*(NPV-Expected value)^2/Total Probability]^(1/2)

=17.13millon(Approx).

Coefficient of variation=Standard deviation/Expected NPV

=(17.13/7)

=2.45(Approx).

probability NPV probability*(NPV-Expected value)^2 0.05 -32 0.05*(-32-7)^2=76.05 0.2 -18 0.2*(-18-7)^2=125 0.5 12 0.5*(12-7)^2=12.5 0.2 24 0.2*(24-7)^2=57.8 0.05 28 0.05*(28-7)^2=22.05 Total=293.4

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