The managers of Merton Medical Clinic are analyzing a proposed project. The project's most likely NPV is $120,000, but as evidenced by the following NPV distribution, there is considerable risk involved: Probability NPV 0.05 ($700,000) 0.2 ($250,000) 0.5 $120,000 0.2 $200,000 0.05 $300,000 (a) What are the project's expected NPV and standard deviation of NPV? (b) Should the base case analysis use the most likely NPV or the expected NPV? Explain your answer.
The managers of Merton Medical Clinic are analyzing a proposed project. The project's most likely NPV is $120,000, but as evidenced by the following NPV distribution, there is considerable risk involved: Probability NPV 0.05 ($700,000) 0.2 ($250,000) 0.5 $120,000 0.2 $200,000 0.05 $300,000 (a) What are the project's expected NPV and standard deviation of NPV? (b) Should the base case analysis use the most likely NPV or the expected NPV? Explain your answer.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:The managers of Merton Medical Clinic are analyzing a proposed project. The project's most likely NPV is $120,000, but
as evidenced by the following NPV distribution, there is considerable risk involved:
Probability
NPV
0.05 ($700,000)
0.2 ($250,000)
0.5 $120,000
0.2 $200,000
0.05 $300,000
(a) What are the project's expected NPV and standard deviation of NPV?
(b) Should the base case analysis use the most likely NPV or the expected NPV? Explain your answer.
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