What is the expected value of the npv

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Reference no: EM131135566

Your company asked you to evaluate two potential projects. These projects are active for 10 years and have no salvage life. Both have the same upfront costs, but the revenue stream from each of the projects is subject to variation, so risk is involved.                                                                                                            

You are given the following information:                                                                                              

Firm's cost of capital: 10%

Each project will require three years of investment before revenues are generated.

The following cost distribution is given:

 

Probability of Outcome

Year 1 Investment Costs

Year 2 Investment Costs

Year 3 Investment Costs

Expected Annual Revenues in Year 4

Expected Rate of Increase in Annual Revenues

Project 1

 

 

 

 

 

 

 Outcome A

20%

$1,000

$2,000

$1,000

500

2%

 Outcome B

40%

$1,000

$2,000

$1,000

650

3%

 Outcome C

40%

$1,000

$2,000

$1,000

850

4%

Project 2

 

 

 

 

 

 

 Outcome A

10%

$1,000

$2,000

$1,000

675

2%

 Outcome B

50%

$1,000

$2,000

$1,000

700

2.40%

 Outcome C

40%

$1,000

$2,000

$1,000

725

2.80%

In a new worksheet in Excel, answer the following:

1. What is the expected value of the NPV for each of the projects?

2. What is the standard deviation of the NPV for each of the projects?

3. What is the coefficient of variation of the NPV for each of the projects?

4. Which project has a higher expected return? Which has more risk?

5. Which one would you recommend to your company? How does its attitude toward risk affect your answer?

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Reference no: EM131135566

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