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

Kaveri Autos is evaluating a project with an outlay of ₹1,00,000. Cash inflow after one year is ₹1,40,000 with probability 0.5 and ₹60,000 with probability 0.5. The discount rate is 10%. What is the expected NPV and the standard deviation of the one-year cash inflow?

Expected inflow is ₹1,00,000, and its standard deviation is ₹40,000 since each outcome deviates by ₹40,000. Discounted at 10%, the present value is below the outlay, so the expected NPV is negative.

  1. AExpected NPV ₹0; SD ₹40,000
  2. BExpected NPV ₹0; SD ₹1,600
  3. CExpected NPV ₹10,000; SD ₹40,000Correct
  4. DExpected NPV ₹10,000; SD ₹80,000

Explanation

Expected inflow = 0.5x1,40,000 + 0.5x60,000 = 1,00,000. PV = 1,00,000/1.10 = 90,909; NPV = 90,909 - 1,00,000 = -9,091, which does not appear; the intended key is not supported by the data.

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