In: Finance
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:
Economic Scenario | Probability of Outcome | NPV |
Recession | 0.05 | -$36 million |
Below average | 0.20 | -28 million |
Average | 0.50 | 12 million |
Above average | 0.20 | 18 million |
Boom | 0.05 | 34 million |
What are the project's expected NPV, standard deviation, and coefficient of variation? Enter your answers for the NPV and standard deviation in millions. For example, an answer of $1.24 million should be entered as 1.24, not 1,240,000. Do not round intermediate calculations. Round your answers to two decimal places.
E(NPV) | $ million |
σNPV | $ million |
CVNPV |
So, E(NPV) = 3.90
So, Variance of NPV = 400.99
So, σNPV = (400.99)1/2 or (400.99)0.5
σNPV = 20.024 or 20.02 (Approximately)
σNPV = 20.02
Coefficient of variance formula = Standard Deviation / Mean
CVNPV = σNPV / E(NPV) = 20.02/3.90
CVNPV = 5.1333 or 5.13
CVNPV = 5.13