A company is considering investing in a new project, which has an expected net present value (NPV)
Question:
A company is considering investing in a new project, which has an expected net present value (NPV) of $500,000. However, there is a 30% chance that the project will result in a net loss of $250,000 instead. To manage this risk, the company has decided to purchase an insurance policy that pays out $200,000 in the event of a loss. The premium for the insurance policy is $60,000.
Calculate the expected NPV of the project with the insurance policy and the expected value of the company's net cash flow. Also, determine the standard deviation of the net cash flow and the coefficient of variation.
Show all the calculations and express your final answers in dollars.
Managerial Economics A Problem Solving Approach
ISBN: 978-1133951483
3rd edition
Authors: Luke M. Froeb, Brian T. McCann, Mikhael Shor, Michael R. War