1 Scenario AnalysisShao Industries is considering a proposed project for its capital budget. Thecompany estimates the project’s NPV is $12 million. This estimate assumesthat the economy and market conditions will be average over the next fewyears. The company’s CFO, however, forecasts there is only a 50% chancethat the economy will be average. Recognizing this uncertainty, she has alsoperformed the following scenario analysis: Economic Scenario Probability of Outcome NPVRecession 0.05 -$70 millionBelow average 0.20 -25 millionAverage 0.50 12 millionAbove average 0.20 20 millionBoom 0.05 30 millionWhat are the project’s expected NPV, standard deviation, and coefficient ofvariation?
1 Scenario Analysis
Shao Industries is considering a proposed project for its capital budget. The
company estimates the project’s
that the economy and market conditions will be average over the next few
years. The company’s CFO, however,
that the economy will be average. Recognizing this uncertainty, she has also
performed the following scenario analysis:
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
What are the project’s expected NPV, standard deviation, and coefficient of
variation?
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