Question: Merton Clinic managers are analyzing a new project. The projects most likely NPV is $120000. The project cost of capital (discount rate) is 10 percent.
Merton Clinic managers are analyzing a new project. The projects most likely NPV is $120000. The project cost of capital (discount rate) is 10 percent.
Probability NPV
0.05 ($800,000)
0.25 200,000
0.50 400,000
0.20 600,000
What is the projects coefficient of variation?
a. 1.54
b. 1.85
c. *0.88
d. 0.85
e. 1.00
5. Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows and probabilities (Prob.):
| Year | Prob=0.2 | Prob=0.6 | Prob=0.2 |
| 0 | -$100,000 | -$100,000 | -$100,000 |
| 1 | 20,000 | 30,000 | 40,000 |
| 2 | 20,000 | 30,000 | 40,000 |
| 3 | 20,000 | 30,000 | 40,000 |
| 4 | 20,000 | 30,000 | 40,000 |
| 5 | 30,000 | 40,000 | 50,000 |
The Year 5 values include salvage value. Heywoods corporate cost of capital is 10 percent.
What is the projects expected (i.e., base case) NPV assuming average risk? (Hint: The base case net cash flows are the expected cash flows in each year.)
a.-$17,975
*b. $19933
c.$57841
d.-$100,000
e. $50,000
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