Question

Teddy Bridge has invented a new phone called Enola, and trademarked it. They intend on investing in marketing and warehouses for a total of $2 million. If there is a good market acceptance (65% chance), cash flows would be $420,000/yr starting in Yr. 1 and will last 8 years. If there is no good acceptance (35%), cash flows will be $75000 per year and last only two years. Calculate: ENPV of project and the standard deviation of the projects NPV. Discount rate: 10%.

Answer 1

Calculation of Net Present value
Year	At 65%	At 35%
Cash Flow	Discount Factor@10%	Discounted Cash Flows	Cash Flow	Discount Factor@11%	Discounted Cash Flows
A	B	C = 1/(1+10%)^A	D = B*C	E	F = 1/(1+11%)^A	G = E*F
0	($2,000,000)	1	-2000000	($2,000,000)	1	-2000000
1	$420,000	0.909090909	381818.1818	$75,000	0.909090909	68181.81818
2	$420,000	0.826446281	347107.438	$75,000	0.826446281	61983.47107
3	$420,000	0.751314801	315552.2164	$75,000	0.751314801	56348.61007
4	$420,000	0.683013455	286865.6513	$75,000	0.683013455	51226.00915
5	$420,000	0.620921323	260786.9557	$75,000	0.620921323	46569.09923
6	$420,000	0.56447393	237079.0506	$75,000	0.56447393	42335.54475
7	$420,000	0.513158118	215526.4097	$75,000	0.513158118	38486.85887
8	$420,000	0.46650738	195933.0997	$75,000	0.46650738	34988.05352
NPV			240669.0031			-1599880.535

ENPV = [65% * $240,669.0031] + [35% * -$1,599,880.535]

= $156,434.852 -$559,958.1873

= -$403,523.3353

ENPV of the project is -$403,523.34

Variance of Project = Σ Probability * (NPV - ENPV)^2

=[65% * ($156,434.852 - (-$403,523.3353))^2] + [35% * (-$559,958.1873 - (-$403,523.3353))^2

= [65% *$ 313553171529.96] + [35%*$24,471,862,928.84]

= $203,809,561,494.48 + $8,565,152,025.10

= $212,374,713,519.57

Standard Deviation of the Project = Square root of Variance

= ($212,374,713,519.57)^(1/2)

= $460,841.31056

Therefore,

ENPV of the project is -$403,523.34

Standard deviation of the Project is $460,841.31