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Fundamentals of Financial Manageme...

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

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BuyFindarrow_forward

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)

Recession0.05(70)(3.5)

Below

average

0.20(25)(5)
Average0.50126
Above average0.20204
Boom0.05301.5
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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