Example One: Expected Monetary Value and Standard Deviation

JLtd is a private limited company in the electronics industry. In order to improve its operations,

the company is contemplating to purchase $8$ computers at a cost of Sh$.100,000$ each.

Installation cost for all the computers will amount to Sh$.80,000.$ It is estimated that once installed,

the computers will increase the company's earnings before depreciation and tax from Sh$.$

$12,000,000$ to Sh$.12,500,000$ annually. The computers are expected to last for $10$ years after which

they will be obsolete with no resale value.

The Operations Manager proposes that the computers will be useful for $15$ years with no resale

value. The Marketing Manager on the other hand argues that the company needs the computers for

only five years after which they will be disposed of at Sh$.50,000$ each. The probability distribution

of the useful life of the computers is given as follows.:

The company is in the $30\%$ tax bracket and its cost of capital is $10\%.$ It uses the straight line

method to depreciate all of its non$-$current assets.

Required:

$($i$)$ The expected NPV of the project

$($ii$)$ The standard deviation of the expected NPV$.$