Skip to content

CMA Final · Strategic Financial Management · Evaluation of Risky Proposals for Investment Decisions

A project has three possible NPV outcomes (₹ lakh): −2 with probability 0.2, 4 with probability 0.5 and 10 with probability 0.3. The coefficient of variation of the project's NPV is closest to:

The coefficient of variation is about 0.91. Expected NPV is ₹4.6 lakh and the variance is 17.64, so the standard deviation is ₹4.2 lakh. Dividing the standard deviation by the expected NPV gives 4.2/4.6, which is roughly 0.91, the risk per unit of expected return.

  1. A1.10
  2. B3.83
  3. C0.42
  4. D0.91Correct

Explanation

Expected NPV = 0.2(−2) + 0.5(4) + 0.3(10) = 4.6. Variance = 0.2(6.6)² + 0.5(0.6)² + 0.3(5.4)² = 8.712 + 0.18 + 8.748 = 17.64, so SD = 4.2. CV = 4.2/4.6 = 0.91. The 1.10 option inverts the ratio (mean/SD), and 3.83 divides the variance rather than the SD by the mean.

Did you get it right without looking?

One question tells you little. A timed set on Evaluation of Risky Proposals for Investment Decisions shows your real accuracy, how long you take and where you lose marks.

Practise Evaluation of Risky Proposals for Investment DecisionsFree diagnostic mock

More Evaluation of Risky Proposals for Investment Decisions questions