ch12_p2HWsol

ch12_p2HWsol - a. Calculate the expected NPV for both...

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CHAPTER 12: RISK, CAPITAL BUDGETING, AND DIVERSIFICATION Solution 1. Trail Guides, Inc. is currently evaluating two mutually exclusive investments. After doing a scenario analysis and applying probabilities to each scenario, they have determined that the investments have the following distributions around the expected NPVs. Probability NPV A NPV B 15% –$40,000 –$15,000 20% –10,000 2,500 30% 20,000 20,000 20% 50,000 37,500 15% 80,000 55,000 Several members of the management team have suggested that Project A should be selected because it has a higher potential NPV. Other members have suggested that Project B appears to be more conservative and should be selected. They have asked you to resolve this question.
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Unformatted text preview: a. Calculate the expected NPV for both projects. Can the question be resolved with this information alone? b. Calculate the variance and standard deviation of the NPVs for both projects. Which project appears to be riskier? c. Calculate the coefficient of variation for both projects. Does this change your opinion from part b? d. Calculate the probability of a negative NPV for both projects. e. Which project should be accepted? Worksheet: 537 CHAPTER 12: 0BRISK, CAPITAL BUDGETING, AND DIVERSIFICATION 538 Text Problem Solutions Formulas: Possible Answer : Accept Project B because it has the same expected NPV as Project A, but less risk....
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ch12_p2HWsol - a. Calculate the expected NPV for both...

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