Mayes & Co. is currently evaluating two mutually exclusive investments. After do
ID: 2633738 • Letter: M
Question
Mayes & Co. is currently evaluating two mutually exclusive investments. After doing a scenario analysis and applying probabilities to each scenario, it has determined that the investments have the following distribution around the expected NPVs.
Probability
NPV(A)
NPV(B)
10%
$ (30,600.00)
$ (11,475.00)
20%
$ (7,650.00)
$ 1,913.00
40%
$ 15,300.00
$ 15,300.00
20%
$ 38,250.00
$ 28,688.00
10%
$ 61,200.00
$ 42,075.00
You were asked to determine which of the two projects should be accepted.
Bonus:
Please show detailed steps and use Excel!!!!! WILL offer max points
Probability
NPV(A)
NPV(B)
10%
$ (30,600.00)
$ (11,475.00)
20%
$ (7,650.00)
$ 1,913.00
40%
$ 15,300.00
$ 15,300.00
20%
$ 38,250.00
$ 28,688.00
10%
$ 61,200.00
$ 42,075.00
Explanation / Answer
1.
2)
Variance of A:$144,199,440.00
Variance of B = $215,070,187.56
3) From above table
4) coefficient of variation = std deviation/expecetd NPV
coefficient of variation of A = 12,008.31/$15,300.00= 0.78
coefficient of variation of A = 14,665.27/15,300.20= 0.96
Bonus:
1.
probability of a negative NPV for A = 10%+20%= 30%
probability of a negative NPV for B = 10%
2.Project A should be accepted because it has comparable expected NPV but lower risk
Probability NPV(A) NPV(B) Probability*NPV(A) Probability*NPV(B) 10% ($30,600.00) ($11,475.00) ($3,060.00) ($1,147.50) 20% -7,650.00 1,913.00 ($1,530.00) $382.60 40% 15,300.00 15,300.00 $6,120.00 $6,120.00 20% 38,250.00 28,688.00 $7,650.00 $5,737.60 10% 61,200.00 42,075.00 $6,120.00 $4,207.50 Expected NPV $15,300.00 $15,300.20