Question
You manage a division of a mining company, currently evaluating a project where profitability is heavily dependent on demand from the Chinese export market, which
You manage a division of a mining company, currently evaluating a project where profitability is heavily dependent on demand from the Chinese export market, which is subject to some uncertainty. You consider four likely scenarios with respect to change in demand on the previous 3-year period, which are (i) zero change, (ii) a moderate 10 percent growth in demand, (iii) a moderate 10 percent decline in demand, and (iv) a significant 20 percent decline in demand. You calculate the NPV for the project under each scenario, as outlined in the table below. You then ask an external economics research division to calculate probabilities for these four possible scenarios. They calculate the probability of scenarios (i) to (iv) as 0.20, 0.25, 0.30 and 0.25, respectively. Calculate the expected NPV for this project, on the basis of these probabilities
Scenario NPV
(i) No change $5,000,000
(ii) moderate 10% growth $8,000,000
(iii) moderate 10% decline $1,800,000
(iv) significant 20% decline -$5,200,000
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