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

For a project, the expected NPV is ₹90,000 and the standard deviation of NPV is ₹60,000. Assuming NPV is normally distributed, what is the probability that NPV is negative? (Area under normal curve for Z = 1.5 is 0.4332.)

The probability of negative NPV is 6.68%. Zero lies 1.5 standard deviations below the mean NPV, and the tail area beyond that point is 0.5 minus 0.4332, which equals 0.0668.

  1. A6.68%Correct
  2. B43.32%
  3. C56.68%
  4. D93.32%

Explanation

Z = (0 - 90,000)/60,000 = -1.5. Area from mean to Z is 0.4332, so the probability of NPV below zero = 0.5 - 0.4332 = 0.0668, i.e. 6.68%. The 93.32% option is the probability of a positive NPV, and 43.32% ignores the half-area.

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