Trial Guides, Inc., is currently evaluating two mutually exclusive investments. After doing a scenario analysis and applying probabilities to each scenario, they have determined that the investments have the following distributions around the expected NPVs.
Probability NPVa NPVb
15% -$40,000 $-15,000
20% -$10,000 $2,500
30% $20,000 $20,000
20% $50,000 $37,500
15% $80,000 $55,000
Several members of the management team have suggested that Project A should be selected because it has a higher potential NPV. Other members have suggested that Project B appears to be more conservative and should be selected. They have asked you to resolve this problem.
a) find out the expected NPV for both projects. Can the problem be resolved with this information alone?
b) find out the variance and standard deviation of the NPVs for both projects. Which project appears to be riskier?
c) find out the coefficient of variation for both projects. Does this change your opinion from part b?
d) find out the probability of a negative NPV for both projects.
e) Which project should be accepted?