   Chapter 12, Problem 7P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

SCENARIO ANALYSIS 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 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 project's expected NPV, standard deviation, and coefficient of variation.

Summary Introduction

To compute: Net present value (NPV), standard deviation and coefficient of variation of the project.

Introduction:

Scenario Analysis:

Under this analysis, the management considers different alternatives outcome to analyze the future events. It is the method in which the analyst estimates the expected future value after a period of time.

Explanation

Prepare table that shows the calculation of expected NPV.

 Economic Scenario Probability of outcome (A) NPV (million $) (B) Expected NPV (million$) (C) (A)×(B) Recession 0.05 (70) (3.5) Below average 0.20 (25) (5) Average 0.50 12 6 Above average 0.20 20 4 Boom 0.05 30 1.5 Total 3

Table (1)

Calculation of standard deviation,

 Economic Scenario Expected NPV (million $) (C) (D) (B)−(C) (million$) (D)2 (A)×(D)2 Recession (3

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