SCENARIO ANALYSIS

Assume a New Hospital Venture Been Analyzed in Terms of Various Cashflows Associated with Various States of the Overall Local Economy

The Following Table Shows the Resulting Internal Rate of Return for the Venture Under Each Potential State of the Economy and assuming a $10\%$ Cost of Capital for all discounting

State of Economy Probability of Occurrence Internal Rate of Return Weighted Rate Project Risk Adjustment Table

$\%\%$ CV Adjustment basis points to cost of capital

Very Poor $0\mathrm{.}1-20\mathrm{.}00<2\mathrm{.}00$

$2\mathrm{.}0$ to $2\mathrm{.}2575$

Poor $0\mathrm{.}2-10\mathrm{.}002\mathrm{.}25-2\mathrm{.}5100$

$2\mathrm{.}5-3\mathrm{.}0175$

Average $0\mathrm{.}49\mathrm{.}00>3\mathrm{.}0275$

Good $0\mathrm{.}215\mathrm{.}00$

Very Good $0\mathrm{.}120\mathrm{.}00$

$1)$ What is the Expected Rate of Returnon the project? Note that you must use long version of formula and can't use Excel "Expected Rate of Return" due to the Probability weights of each scenario. SEE PAGE $374-377$ OF TEXTBOOK

Be sure to show your work

$2)$ What is the project's standard deviation of returns? Note that you must use long version of formula and can't use Excel NPV Formula or Variance Formula due to the Probability weights of each scenario. SEE PAGE $377$ OF TEXTBOOK

Be sure to show your work

$3)$ What is the project's coefficient of variation $($CV$)$ of returns? SEE PAGE $586$ OF TEXTBOOK

Be sure to show your work

$4)$ What type of risk does the standard deviation and CV measure?

$5)$ In what situation is this risk relevant?

$6)$ You will learn more about the coefficient of variation in later chapters, but if know that a coefficient under $2\mathrm{.}0$ is considered "average risk" do you think we would need to apply any "risk" adjustment factor to our cash flows cost of capital?

If no$,$ why not. If yes, what would our new cost of capital and explain your answer....Use TABLE at top right of this worksheet to assist in your response

$7)$ Explain the difference between a number stated as a percentage vs$.$ "basis points"