Please use Excel and upload the excel file and copy the link so I can download i
ID: 2766278 • Letter: P
Question
Please use Excel and upload the excel file and copy the link so I can download it
Two mutually exclusive proposed projects have the following cash flow estimates: The planning horizon is 5 years, and MARJR. is 10%. All cash flows are normally distributed. For the following questions, determine an analytical solution: The mean and the standard deviation of the net present value for each alternative. The probability that the present value is positive The probability that alternative 1 is preferred over alternative 2.Explanation / Answer
a)
Alternative 1
Net Present value=-Initial investment+ P.V of annual revenue+ P.V of salvage value
NPV=-750000+75000*Annuity Factor(10% for 5 years)+125000/(1.1^5)
NPV=-750000+75000*3.791+125000/(1.1^5)
Mean NPV=-$388059.8
Standard deviation of Initial investment=15000
Standard deviation of Annual revenue=1500*3.791=5686.5
Standard deviation of salvage value=2500/1.1^5=1552.3
Net S.D of the NPV =(15000^2+5686.5^2+1552.3^2)^0.5=16116.6
Alternative 2
Net Present value=-Initial investment+ P.V of annual revenue+ P.V of salvage value
NPV=-750000+75000*Annuity Factor(10% for 5 years)+125000/(1.1^5)
NPV=-750000+75000*3.791+125000/(1.1^5)
Mean NPV=-$388059.8
Standard deviation of Initial investment=150000
Standard deviation of Annual revenue=15000*3.791=56865
Standard deviation of salvage value=25000/1.1^5=15523
Net S.D of the NPV =(150000^2+56865^2+15523^2)^0.5=161166
b)
For alternative A
Z value for Mean NPV to be zero=(0-(-388059.8))/ 16116.6=24
Thus Probability for Z=24 is 0
For alternative B
Z value for Mean NPV to be zero=(0-(-388059.8))/ 161166=2.4
Thus Probability for Z=2.4 is 0.9793
Thus Probability NPV>0 =1-0.9793=2.07%