Homework
Using excel spread sheet: Assume a New Hospital Venture Been Analyzed in Terms of Various Cashflows Associated with Various States of the Overall Local Economy
The Following Table Shows the Resulting Internal Rate of Return for the Venture Under Each Potential State of the Economy and assuming a 10% Cost of Capital for all discounting
State of Economy Probability of Occurrence (%) Internal Rate of Return (%) Project Risk Adjustment Table (CV) Adjustment basics
points to capital
Very Poor 0.1 -20.00 <2.0 0
2.0 to 2.25 50
Poor 0.2 -10.00 2.25-2.5 75
2.5-3.0 100
Average 0.4 10.00 >3.0 200
Good 0.2 15.00
Very Good 0.1 20.00
A. What is the expected rate of return on the project?
B. What is the project's standard deviation of returns?
C. What is the project's coefficient of variation (CV) of returns?
D. What type of risk does the standard deviation and CV measure?
E. In what situation is this risk relevant?
F. You will learn more about the coefficient of variation in later chapters, but if know that a coefficient under 2.0 is considered "average risk" do you think we would need to apply any "risk" adjustment factor to our cash flows cost of capital? If no, why not. If yes, what would our new cost of capital?
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