A simulation analysis for a new acquisition has indicated that the expected NPV is $50 million with a standard deviation of $40 million. Assume that NPV is normally distributed. What is the probability that the project will be unacceptable?
A) 89.44%
B) 10.56%
C) 39.44%
D) 21.19%

Question

Quizplus · Accepted Answer

To determine the probability that the project will be unacceptable, we need to calculate the probability that the NPV is negative. We can do this by standardizing the NPV using the formula z = (x - μ) / σ, where x is the NPV, μ is the mean (expected NPV) and σ is the standard deviation.

z = (0 - 50) / 40 = -1.25

Using a standard normal distribution table or calculator, we find that the probability of getting a z-score of -1.25 or lower is 0.1056 or 10.56%, which is the probability that the project will be unacceptable.

A Simulation Analysis for a New Acquisition Has Indicated That