Greengage, Inc., a successful nursery, is considering several expansion projects
ID: 2763384 • Letter: G
Question
Greengage, Inc., a successful nursery, is considering several expansion projects. All of the alternatives promise to produce an acceptable return. Data on four possible projects follow:
A. Which project is least risky, judging on the basis of range?
B. Which project has the lowest standard deviation? Explain why standard deviation may not be an entirely appropriate measure of risk for pusrposes of this comparison.
C. Calculate the coefficient of variation for each project. Which project do you think Greengage's owners should choose? Explain why
Project expected return range standard deviation A 13.4% 5.1% 3.8% B 12.4 4.7 3.9 C 11.6 5.7 3.6 D 12.8 4.9 2.8Explanation / Answer
A. On the basis of range, Project B is the least risky. B. Project D has the lowest standard deviation. Standard deviation only considers the effect of probability in the analysis of the project returns. Hence, it would be advisable to calculate the coefficient of variation for each project, since this considers both the range and the return analysis while working out the coefficient. C. Coefficient of Variation Project wise Project Coefficient of Variation A 74.5% B 83.0% C 63.2% D 57.1% Since the coefficient of variation for Project D is the lowest, this implies that the project carries minimum risk vis-à-vis standard deviation. Hence, Project D should be accepted.
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