Unformatted text preview: 1.9. Assume that EY is confident of its estimates of all the variables that affect the project's cash flows except unit sales and sales price.
Expected NPV =
Standard Deviation =
Coefficient of Variation = Std Dev / Expected NPV =
1.10. Assume that Merafe's average project has a coefficient of variation in the range of 0.2 to 0.4. Would the new line be classified
as high risk, average risk, or low risk?
1.11. Merafe typically adds or subtracts 3 percentage points to the overall cost of capital to adjust for risk. Should the new line be accepted?
Cost of capital for average projects:
Adjustment for risky projects:
Risk adjusted cost of capital:
NPV with risk adjusted cost of capital:
$65,371 (See the +30% WACC in the sensitivity analysis above.)...
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- Spring '12
- Standard Deviation, Merafe's average project