a. Calculate the expected NPV for both projects. Can the question be resolved with this information alone? b. Calculate the variance and standard deviation of the NPVS for both projects. Which project appears to be riskier? c. Calculate the coefficient of variation for both projects. Does this change your opinion from part b? d. Calculate the probability of a negative NPV for both projects. e. Which project should be accepted? Why?

a. Calculate the expected NPV for both projects. Can the question be resolved with this information alone? b. Calculate the variance and standard deviation of the NPVS for both projects. Which project appears to be riskier? c. Calculate the coefficient of variation for both projects. Does this change your opinion from part b? d. Calculate the probability of a negative NPV for both projects. e. Which project should be accepted? Why?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 9PB: Joliet Company is considering two alternative investments. The company requires an 18% return from...

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

1. Lemon, a scooter rental company, is currently evaluating two mutually exclusive
investments. After doing a scenario analysis and applying probabilities to each
scenario, it has determined that the investments have the following distributions
around the expected NPVS.
Probability
NPVA
NPV,
10%
-$59,670
-$2,377
20%
-14,918
3,729
40%
29,835
29,835
20%
74,588
55,941
10%
119,340
82,047
Several members of the management team have suggested that Project A should
be selected because it has a higher potential NPV. Other members have suggested
that Project B appears to be more conservative and should be selected. They have
asked you to resolve this question.
a. Calculate the expected NPV for both projects. Can the question be resolved
with this information alone?
b. Calculate the variance and standard deviation of the NPVS for both projects.
Which project appears to be riskier?
c. Calculate the coefficient of variation for both projects. Does this change your
opinion from part b?
d. Calculate the probability of a negative NPV for both projects.
e. Which project should be accepted? Why?

А
В
1
Lemon Scooters
Probability
NPVA
NPV3
(59,670)
(14,918)
(22,377)
3,729
3
10%
4
20%
40%
29,835
29,835
6
20%
74,588
55,941
7
10%
119,340
82,047
8 Expected NPV
9 Variance
10 Standard Deviation
11 Coefficient of Variation
12 Prob(NPV <= 0)
13
14
15 Calculations Using Arrays
16 Expected NPV
17 Variance
18 Standard Deviation
10
2.

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