Shao Industries is considering a proposed project for its capital budget. The company estimates the project's NPV
Question:
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:
What is the project's expected NPV, its standard deviation, and its coefficient of variation?
Economic Probability of Outc ome Scenario NPV Recession 0.05 --S70 million Below average 0.20 -25 million Average 0.50 12 million Above average 0.20 20 million Boom 0.05 30 million
Step by Step Answer:
ENPV 00570 02025 05012 02020 00530 ...View the full answer
Corporate Finance A Focused Approach
ISBN: 978-1439078082
4th Edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham
Related Video
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
Students also viewed these Corporate Finance questions
-
Estimate the absolute standard deviation and the coefficient of variation for the results of the following calculations. Round each result to include only significant figures the numbers in...
-
Huang Industries is considering a proposed project whose estimated NPV is $12 million. This estimate assumes that economic conditions will be average. However, the CFO realizes that conditions could...
-
The board of Kopi Industries is considering a new dividend policy that would set dividends at 60% of earnings. The recent past has witnessed earnings per share (EPS) and dividends paid per share as...
-
Preparing and interpreting a statement of cash flows using a T-account work sheet. Financial statement data for Dickerson Manufacturing Company for the current year appear in Exhibit 5.29. Additional...
-
How does IFRS differ from current U.S. GAAP in accounting for other-than temporary impairments?
-
Suppose an Olympic diver who weighs 52.0 kg executes a straight dive from a 10-m platform. At the apex of the dive, the diver is 10.8 m above the surface of the water. (a) What is the potential...
-
What are the advantages and disadvantages of certified environmental product declarations? Assuming that you are the environmental manager of Global Autos, with companies operating in Sweden,...
-
Maximize 10x + 12y + 10z subject to the constraints Solve the linear programming problem by the simplex method. 2 y + 3z s 12 2 0, 20, :20.
-
Voila is an allequity firm with pretax earnings expected to be $800,000 in perpetuity. The firm has 100,000 shares outstanding. The cost of capital is 20% and the firm faces a 40% tax on all...
-
Before the merger of Mendys and Arbys Wendys made a huge purchase of its own shares and in total bought back over 26 million shares for approximately $1 billion. Before the purchase, 125.5 million...
-
St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $27,000 to $54,000 per year. The new...
-
Madison Manufacturing is considering a new machine that costs $250,000 and would reduce pre-tax manufacturing costs by $90,000 annually. Madison would use the 3-year MACRS method to depreciate the...
-
In a survey of her introductory statistics class, an instructor found the average number of Facebook friends the 49 respondents had was 539.2 and the standard deviation was 298. The data on number of...
-
2. A 2.0 m-long 1.0 kg rod is hinged at one end and connected to a wall. It is held out horizontally and then released. What is the speed of the tip of the rod when it hits the wall? Hinge Before:...
-
on In the shown RC circuit, the capacitor is initially uncharged when the switch s is closed. Assuming = 30 V The charge (in C) of the capacitor at t = 1.0s is: 40kQ E 50F
-
Consider modeling a bank: The bank keeps the personal information of each customer including name, sex, address, phone number, social security number, and date of birth. Each customer owns one or...
-
Prepare Schedules M-1 and K-1 (for Blake Turin only) for tax year 2019. See attached set of facts and blank tax forms. Please download the tax forms, prepare them manually, then scan and submit the...
-
The figure below shows a conducting loop consisting of a half circle of radius r = 0.2 m and three straight sections. The half circle lies in a uniform magnetic field that is directed out of the...
-
When cant we see the crystals in rocks?
-
Gordon and Lisa estimate that they will need $1,875,000 in 40 years for their retirement years. If they can earn 8 percent annually on their funds, how much do they need to save annually?
-
Write nuclear equations to represent the formation of an isotope of element 83 with a mass number of 218 by the bombardment of uranium-238 by hydrogen-2 nuclei, followed by a succession of five...
-
a. Differentiate between the terms expected rate of return, required rate of return, and historical rate of return as they are applied to common stocks. b. If you found values for each of these...
-
What does the term risk aversion mean, and how is risk aversion related to the expected return on a stock?
-
What is the Capital Asset Pricing Model (CAPM)? What are some of its key assumptions? Has it been empirically verified? What is the role of the Security Market Line in the CAPM? Suppose you had to...
-
Read the Modules on the topic of Cost Analysis. Resolve the exercises below. Show how you obtained the results through a step-by-step computational approach. All verbal sentences should be written in...
-
Another parallel circuit has been constructed with two fixed resistors. A1 (A) 6 A 10 A2 A 20 The resistance of each resistor is shown on the circuit diagram. Calculate the current you would expect...
-
Charles was a jewellery designer and placed the following advertisement in West Noon Post on 1 November 2021. For Sale Handmade "88-shaped" necklace on display HK$10,000 Come to my shop and buy it...
Study smarter with the SolutionInn App