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CS Professional · Strategic Management and Corporate Finance · Project Evaluation

Kaveri Pharma is considering Project X with expected NPV of Rs 50 lakh and standard deviation of Rs 25 lakh, and Project Y with expected NPV of Rs 80 lakh and standard deviation of Rs 60 lakh. Using the coefficient of variation to compare risk per unit of return, which statement is correct?

Project X is preferable. Its coefficient of variation is 25/50 = 0.50, while Project Y's is 60/80 = 0.75. A lower coefficient of variation means less risk per rupee of expected return.

  1. AProject Y is preferable because its coefficient of variation is 0.75, lower than X's 0.50
  2. BProject X is preferable because its coefficient of variation is 0.50, lower than Y's 0.75Correct
  3. CProject X is preferable because its coefficient of variation is 2.0, higher than Y's 1.33
  4. DBoth are equal because the coefficient of variation is the same

Explanation

CV = standard deviation / expected NPV. X: 25/50 = 0.50. Y: 60/80 = 0.75. Lower CV means less risk per rupee of expected return, so X is preferable. Option A reverses the comparison.

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