Skip to content

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

Ganga Foods is evaluating a project with an initial outlay of ₹1,00,000. Its single cash inflow at the end of Year 1 is ₹80,000 with probability 0.25, ₹1,20,000 with probability 0.50, and ₹1,60,000 with probability 0.25. The discount rate is 10%. What is the standard deviation of the project's NPV (rounded to the nearest rupee)?

The standard deviation of NPV is about ₹25,713. The inflow's standard deviation is ₹28,284 from the given probabilities, and because the outlay is certain, it is simply discounted one year at 10%, dividing by 1.10.

  1. A₹25,713Correct
  2. B₹28,284
  3. C₹23,377
  4. D₹31,113

Explanation

Expected inflow = 20,000 + 60,000 + 40,000 = ₹1,20,000. Variance = 0.25×(40,000)² + 0.50×0 + 0.25×(40,000)² = 80,00,00,000, so the standard deviation is ₹28,284. The outlay is certain, so the NPV standard deviation is 28,284 / 1.10 = ₹25,713. ₹28,284 is undiscounted, ₹23,377 discounts at 1.21, and ₹31,113 multiplies by 1.10.

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