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CA Final · Advanced Financial Management · Advanced Capital Budgeting Decisions

Kaveri Engineering is assessing a project with two possible outcomes: an NPV of ₹20 lakh with probability 0.8, and an NPV of −₹30 lakh with probability 0.2. What is the coefficient of variation of the project's NPV (standard deviation divided by expected NPV)?

The coefficient of variation is 2.0. The expected NPV is ₹10 lakh and the probability-weighted variance is 400, giving a standard deviation of ₹20 lakh. Dividing 20 by 10 gives 2.0, a measure of risk per rupee of expected return.

  1. A2.0Correct
  2. B0.5
  3. C2.5
  4. D40

Explanation

Expected NPV = 0.8×20 + 0.2×(−30) = 16 − 6 = ₹10 lakh. Variance = 0.8×(20−10)² + 0.2×(−30−10)² = 80 + 320 = 400, so SD = ₹20 lakh. CV = 20/10 = 2.0. The 2.5 option comes from an unweighted SD of the two values (25) divided by 10, and 40 is variance divided by the mean.

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