Project Alpha has an NPV of $10 million and a standard deviation based on risk a
ID: 2716739 • Letter: P
Question
Project Alpha has an NPV of $10 million and a standard deviation based on risk analysis of $3 million. Project Beta has an NPV of $8 million and a standard deviation based on risk of $2 million. Which project should be selected and why?
a. Select Alpha because it has the higher NPV
b. Select Beta because it has the lower risk as represented by standard deviation
c. Select either project because both have positive NPVs and relatively low risk compared to their NPVs
d. Don't select either project because there is too much risk associated with both projects.
e. There is no clear decision rule, the choice depends on management's degree of risk aversion
Explanation / Answer
e is correct. Project Alpha has higher NPV but higher risk . Vice versa for Project Beta. It depends upon the risk apetite of the management, whether they would like to have a higher NPV but with higher risk or lower NPV but also with lower risk
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