A construction company is considering bidding on a new project. The project has a total estimated cost
Question:
A construction company is considering bidding on a new project. The project has a total estimated cost of $10 million and is expected to take two years to complete. The company has estimated that it will cost $8 million to complete the project, leaving a potential profit of $2 million. However, there is a risk that the project may go over budget, which would reduce the potential profit. The company has estimated that there is a 30% chance that the project will go over budget by $1 million and a 20% chance that it will go over budget by $2 million.The construction company has a cost of capital of 10%. Using expected value and standard deviation, calculate the net present value and coefficient of variation of the project, and provide a recommendation to the company based on your calculations.
Note: Assume that all probabilities are independent. Use a discount rate of 10% for all calculations.
Construction accounting and financial management
ISBN: 978-0135017111
2nd Edition
Authors: Steven j. Peterson