Scenario Analysis Problem 11-11

Shao Industries is considering a proposed project for its capital budget. The company estimates the project's NPV is $12 million. The estimate assumes that the economy and market conditions will be average over the next few years. The company's CFO, however, forcasts there is only a 50% chance that the economy will be average. Recognizing this uncertainty she has also performed the following scenrio analysis:

Economic Scenario Probability of Outcome NPV

Recession 0.05 -$70 million

Below Average 0.20 -25 million

Average 0.50 12 million

Above Average 0.20 20 million

Boom 0.05 30 million

What is the project's expected NPV, its standard deviation and its coefficient or variation?

Answer is :

E(NPV) = $3 million

oNPV= $23,622 million

CV npv = 7.874

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