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In: Finance

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

Junaid answered 2 years ago
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