Klott Company Encounters Significant Uncertainty with Its Sales Volume and Price

question 73

Short Answer

Klott Company encounters significant uncertainty with its sales volume and price in its primary product.The firm uses scenario analysis in order to determine an expected NPV, which it then uses in its budget.The base case, best case, and worst case scenarios and probabilities are provided in the table below.What is Klott's expected NPV, standard deviation of NPV, and coefficient of variation of NPV? $\begin{array}{ccccc}&\text { Probability of } & \text { Unit Sales } &\text { Sales} &\text {NPV}\\&\underline{\text { Outcome }} &\underline{ \text { Volume } }&\underline{\text { Price } }& \underline{\text { (In Thousands) }}\\\text { Worst case } & 0.30 & 6,000 & \$ 3,600 & -\$ 6,000 \\\text { Base case } & 0.50 & 10,000 & 4,200 & +13,000 \\\text { Best case } & 0.20 & 13,000 & 4.400 & +28,000\end{array}$
a. $\text { Expected NPV }=\$ 35,000 ; \sigma_{\mathrm{NPV}}=17,500 ; \quad \mathrm{CV}_{\mathrm{NPV}}=2.0 \text {. }$
b. Expected NPV $=\$ 35,000 ; \quad \sigma_{\mathrm{NPV}}=11,667 ; \quad \mathrm{CV}_{\mathrm{NPV}}=0.33$
c. Expected NPV $=\$ 10,300 ; \sigma_{\mathrm{KPV}}=12,083 ; \quad \mathrm{CV}_{\mathrm{KPV}}=1.17$
d. Expected NPV $=\$ 13,900 ; \sigma_{\mathrm{NPV}}=8,476 ; \mathrm{CV}_{\mathrm{NPV}}=0.61$ .
e. Expected NPV $=\$ 10,300 ; \sigma_{\text {NPV }}=13,900 ; \mathrm{CV}_{\mathrm{NPV}}=1.35$

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Definitions:

Decrease in Income

A reduction in the amount of money received, typically referring to wages, salaries, or investment returns.

MR

Marginal Revenue, which is the additional income derived from selling one more unit of a good or service.

Marginal Revenue

Marginal revenue is the additional income generated from selling one more unit of a good or service.

Own-price Elasticity

A measure of how sensitive the quantity demanded of a good is to a change in its own price, reflecting the responsiveness of demand to price changes.