Brandt Enterprises is considering a new project. Initially, the firm plans to spend $1,000,000 on a feasibility study. There is a 70% chance the results of the study would be positive and Brandt would invest $10,000,000 to proceed. There is a 30% chance the company would not proceed after the feasibility study. If Brandt proceeds there is a 60% chance the NPV of the cash flows at time 2 would be $35,000,000, a 25% chance they would be $15,000,000 and a 15% chance they would be $5,000,000. The WACC is 11.5%.
What is the expected NPV, the standard deviation, and the CV? If the CV of a “normal” project is between 1 and 2, what is your conclusion about the desirability of this project?