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The financial manager of Infinity Plc has estimated the Net Present Value (NPV) of an investment project to be £25 million under the assumption that
The financial manager of Infinity Plc has estimated the Net Present Value (NPV) of an investment project to be £25 million under the assumption that the cash flows associated with the project are normally distributed. Assume that the annual standard deviation is £0.853 million and that the standardized value associated with the 95% confidence level is 1.65.
Required:
Critically assess/evaluate/discuss the value at risk of the project’s NPV if its life span is 5 years, assuming a 95% confidence level.
Solutions
Expert Solution
When the time period increase by a factor of 5, the Standard deviation should increase by the square root of 5 or 0.853 * square root of 5
Hence,
standard deviation for 5 years = 0.853 * (51/2) = 2.236 million
value at risk = 1.65* 2.236
value at risk = 3.147
value at risk = 3.147
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