Question

A project's base case or most likely NPV is $50,000, and assume its probability of

occurrence is 60%. Assume the best case scenario NPV is 60% higher than the

base case and assume the worst scenario NPV is 30% lower than the base case. Both

the best case scenario and the worst case scenario have a 20% probability of

occurrence. Find the project's coefficient of variation.   Enter your answer rounded to

two decimal places. For example, if your answer is 12.345 then enter as 12.35 in the

answer box.

Answer 1

	NPV (in $)	Probability
Base case	50,000.00	0.60
Best case	80,000.00	0.20
Worst case	35,000.00	0.20

Now coefficient of variation = standard deviation/mean

Let us first find the mean NPV. Mean = (0.6*50,000) + (0.2*80,000) + (0.2*35,000)

= $53,000

Standard deviation = [0.6*(50,000-53000)^2 + 0.2*(80,000-53,000)^2 + 0.2*(50000-53000)^2]^1/2

= 14,696.94

Thus coefficient of variation = 14,696.94/$53,000 * 100

= 27.73 %