Question

North Shore Inc. is considering two projects with the following probability of outcome and cash flows.

State of economy        Probability of outcome                Cash flows ($)

                                                                                       A                     B

Strong                                    0.2                                   700                550

Normal                                   0.5                                   400                400

Weak                                      0.3                                    200                300

Compute the expected net present value, standard deviation, and coefficient of variation of each of the project.

Answer 1

Calculate of npv (net present value) expected

ENpv = total of (probability *cash flow)

For project A = 700*0.2+400*0.5+200*0.3

                     = 140 + 200+ 60

                        =400

For project B = 550*0.2+400*0.5+300*0.3

                       =110+200+90

                      = 400$

So npv of both project is same i.e. 400$

Mean (here we refer as xm in image) is same as above i.e. 400 $ for both project

Possible deviations in the expected value

So standard deviations for project A =173.205

And standard deviations for project B = 86.61

Further co,-efficient of variation = standard deviations/estimated net present value

Cv = sd/ENpv

For project A = 173.205/400

                      = .4330

For project B = 86.61/400

                  = .2165