Suppose you are considering investing in a new project that will require an initial investment of $200,000.
Question:
Suppose you are considering investing in a new project that will require an initial investment of $200,000. The project has the potential to generate a net present value (NPV) of $150,000 with a probability of 0.6, or it could have a negative NPV of $100,000 with a probability of 0.4. You are risk-neutral, meaning that you are indifferent between receiving a certain payoff and taking a gamble with the same expected value.
a) What is the expected value (EV) of the project?
b) What is the standard deviation (SD) of the project?
c) What is the coefficient of variation (CV) of the project?
d) Suppose you could purchase perfect information about the project's outcome for $50,000. Should you purchase the perfect information? Explain your answer.
Fundamentals of Corporate Finance
ISBN: 978-1259024962
6th Canadian edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim