Problem 15.1

The managers of Merton Medical Clinic are analyzing a proposed project. The projects most likely NPV is $120,000, but as evidenced by the following NPV distribution, there is considerable risk involved:

Probabilty NPV

0.05 ($700,000)

0.20 (250,000)

0.50 120,000

0.20 200,000

0.05 300,000

a. What are the projects expected NPV and standard deviation of NPV?

b. Should the base case analysis use the most likely NPV or the expected NPV?

Problem 15.2

Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows and probabilities:

Year Prob = 0.2 Prob = 0.6 Prob = 0.2

0 (100,000) (100,000) (100,000)

1 20,000 30,000 40,000

2 20,000 30,000 40,000

4 20,000 30,000 40,000

5 30,000 40,000 50,000

a. What is the projects expected NPV assuming average risk?

b. What are the projects most likely, worst, and best case NPV;s

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

d. What is the projects standard deviation of NPV?