Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 13, Problem 11P

Scenario Analysis

Shao Industries is considering a proposed project for its capital budget. The company estimates the project’s NPV is $12 million. This estimate assumes that the economy and market conditions will be average over the next few years. The company’s CFO, however, forecasts there is only a 50% chance that the economy will be average. Recognizing this uncertainty, she has also performed the following scenario analysis:

Chapter 13, Problem 11P, Scenario Analysis Shao Industries is considering a proposed project for its capital budget. The

What are the project’s expected NPV, standard deviation, and coefficient of variation?

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The risk-free rate of a capital-budgeting project a company wants to undergo is 5% and the expected market rate of return is 10%. The company has a beta of 0.3 and the project being evaluated has risk equal to the average project that the company has accepted in the past. Using the IRR method, determine an appropriate hurdle rate according to CAPM.
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,…
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