Question

Pediatrics Partners is evaluating a project with the following net cash flows and probabilitites.

Year	Prob. =0.25	Prob.=0.5	Prob.=0.25
0	($75,000)	($75,000)	($75,000)
1	15,000	20,000	30,000
2	15,000	20,000	30,000
3	15,000	20,000	30,000
4	15,000	20,000	30,000
5	20,000	30,000	40,000

The Year 5 value includes salvage value. Pediatrics Partners corporate capital of use is 12%.

A. What is the projects expected NPV assuming average risk? ( Hint: The base case net cash flows are the expected cash flows in each year.)

B. What art the projects most likely, worse case, and best case NPV?

C. What is the projects expected NPV on the basis of the scenario analysis?

D. What is the project's standard deviation of NPV?

* Could you please include excel formulas within aswers?*

Answer 1

Calculation of Expected NPV

Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Net Cashflow (NCF)	Probability (P)	NCF*P	Net Cashflows	Probability	NCF*P	Net Cashflows	Probability	NCF*P	Net Cashflows	Probability	NCF*P	Net Cashflows	Probability	NCF*P	Net Cashflows	Probability	NCF*P
-75000	0.25	-18750	15000	0.25	3750	15000	0.25	3750	15000	0.25	3750	15000	0.25	3750	20000	0.25	5000
-75000	0.5	-37500	20000	0.5	10000	20000	0.5	10000	20000	0.5	10000	20000	0.5	10000	30000	0.5	15000
-75000	0.25	-18750	30000	0.25	7500	30000	0.25	7500	30000	0.25	7500	30000	0.25	7500	40000	0.25	10000
		-75000		21250			21250			21250			21250			30000

Years	Cashflows	PVF @ 12%	PV Cashflows
0	-75000	1.00	-75000.00
1	21250	0.89	18973.21
2	21250	0.80	16940.37
3	21250	0.71	15125.33
4	21250	0.64	13504.76
5	30000	0.57	17022.81
	NPV	6566.48

The projects most likely, worse case, and best case NPV

Worst Case scenario

Cash Inflows

15000*3.04+20000*0.57 = 57000

Cash Outflow = 75000

NPV in Worst Case = 18000

Best Case Scenario

Cash Inflows

30000*3.04+40000*0.57 = 114000

Cash Outflow = 75000

NPV in Worst Case = 39,000