29. A firm is evaluating the riskiness of two capital budgeting projects. The fo

Question

29. A firm is evaluating the riskiness of two capital budgeting projects. The following table summarizes the NPV and associated probabilities for various outcomes of the two projects Net Present Value Probability Project A Project B 0.25 -$5,000 $0 0.50 $4,000 $2,000 0.25 $10,000 $8,000 Using the above information, the projects can best be characterized relative to one another by the statement a. Project A is more risky than Project B b. Project B is more risky than Project A c. Since Project A has a higher expected NVP, it should be chosen d. Since Project B has a higher standard deviation, it is more risky and should not be chosen

Explanation / Answer

A is correct because Project A has higher standard deivation than project B

Project A Probability NPV =NPV * probability Actual NPV -expected NPV(A) (A)^2* probability 0.25 -5000 -1250 -8250 17015625 0.5 4000 2000 750 281250 0.25 10000 2500 6750 11390625 Expected NPV = sum of weighted NPV = 3250 Sum(Variance)= 28687500 Standard deviation= Standard deviation of Project A =(sum)^(1/2) 5356.071321 Project B Probability NPV =NPV * probability Actual NPV -expected NPV(B) (B)^2* probability 0.25 0 0 -3000 2250000 0.5 2000 1000 -1000 500000 0.25 8000 2000 5000 6250000 Expected NPV = sum of weighted NPV = 3000 Sum(Variance)= 9000000 Standard deviation= Standard deviation of Project B =(sum)^(1/2) 3000

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.