Allegro Technologies (AT) is an app developer, selling its apps to mobile phone users. It has done some preliminary research on a new app and is considering developing and launching it. Due to rapid changes in consumer tastes in this market it is expected that two years after launch the app would be obsolete and sales would fall to zero. The initial net investment required (including working capital investment) would be 1,850,000, which would be incurred immediately if the project proceeds. 500,000 of the working capital investment will be recovered at the end of the two-year period. ATs WACC is estimated at 13%.

Based on an analysis of past app launches AT has forecast net cash flows from selling the app. If there is high customer demand in the first year, net cash flows of 2,900,000 are expected, if demand is low, net cash flows of 150,000 are expected. The probability of high demand is 0.25, the probability of low demand is 0.75

If there is high demand in the first year, three outcomes are possible in the second year: high demand (net cash flows of 6,000,000 probability of 0.20), moderate demand (net cash flows of 4,000,000 probability of 0.60) or low demand (net cash flows of 500,000 probability of 0.20).

If there is low demand in the first year, three outcomes are possible in the second year: high demand (net cash flows of 700,000 probability of 0.25), moderate demand (net cash flows of 400,000 probability of 0.50) or low demand (net cash flows of 200,000 probability of 0.25).

Note: All cash-flows are after-tax. Round figures to the nearest thousand in your analysis.

Required:

(i) Estimate the Expected NPV and standard deviation for the proposed investment.

(ii) Briefly comment on the use of mean-variance analysis in the context of project