Question $12-2$

Explain why sunk costs should not be included in a capital budgeting analysis but opportunity costs and externalities should be included. Give an example of each.

Problem $127$

Huang Industries is considering a proposed project whose estimated NPV is $$12$ million. This estimate assumes that economic conditions will be $$average$.$ However, the CFO realizes that conditions could be better or worse, so she performed a scenario analysis and obtained these results:

Economic Scenario

Probability of Outcome

NPV

Recession

$0\mathrm{.}05$

$($$$70$ million$)$

Below average

$0\mathrm{.}20$

$(25$ million$)$

Average

$0\mathrm{.}50$

$12$ million

Above average

$0\mathrm{.}20$

$20$ million

Boom

$0\mathrm{.}05$

$30$ million

Calculate the project$$s expected NPV$,$ standard deviation, and coefficient of variation.