Heywood Diagnostic Enterprises is evaluating a project with the following net cash flows and probabilities:
Year Prob = 0.2 Prb =0.6 Prob =0.2
0 ($100,000) ($100,000) ($100,000)
1 $20,000 $30,000 $40,000
2 $20,000 $30,000 $40,000
3 $20,000 $30,000 $40,000
4 $20,000 $30,000 $40,000
5 $30,000 $40,000 $50,000
The Year 5 values include salvage value. Heywood's corporate cost of capital is 10%
c. What is the project's expected NPV on the basis of the scenario analysis?
d. What is the project's standard deviation of NPV?
e. Assume that Heywood's managers judge the project to have lower-than-average risk. The company's policy is to adjust the corporate cost of capital up or down by 3 % points to account for differential risk. Is the project financially attractive? Why?