Page 486 - Corporate Finance PDF Final new link

NPP

486 Corporate Finance BRILLIANT’S

Solution:
(a) Calculation of Expected NPV of Project: (in `)
Year 1 Year 2 Year 3
CF Prob. CF × Prob. CF Prob. CF × Prob. CF Prob. CF × Prob.

800 0.10 80 800 0.1 80 800 0.2 160
1,000 0.20 200 1,000 0.3 300 1,000 0.5 500
1,500 0.40 600 1,500 0.4 600 1,500 0.2 300
2,000 0.30 600 2,000 0.2 400 2,000 0.1 200

EVCF 1,480 1,380 1,160

Years EVCF PVA@5% PV
1 1,480 0.952 1,409
2 1,380 0.907 1,252
3 1,160 0.864 1,002
3,663
Less: Cash outflows 3,000
663
(b) Calculation of standard deviation for each year:
Year 1: (in `)
CF Probability (CF–EVCF) 2 Prob.×(CF–EVCF) 2

800 0.1 (800 – 1,480) 2 46,240
1,000 0.2 (1,000 – 1,480) 2 46,080
1,500 0.4 (1,500 – 1,480) 2 160
2,000 0.3 (2,000 – 1,480) 2 81,120

1,73,600

Standard Deviation( ) = 1,73,600  416.65
1
Year 2: (in `)
CF Probability (CF–EVCF) 2 Prob.×(CF–EVCF) 2
800 0.1 (800 – 1,380) 2 33,640
1,000 0.3 (1,000 – 1,380) 2 43,320
1,500 0.4 (1,500 – 1,380) 2 5,760
2,000 0.2 (2,000 – 1,380) 2 76,880
1,59,600

Standard Deviation ( ) = 1,59,600  399.500
2