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

Meenakshi Textiles is evaluating a project with an expected NPV of Rs 40 lakh and a standard deviation of NPV of Rs 20 lakh. Assuming NPV is normally distributed, what is the approximate probability that the project's NPV will be negative? (Area under the normal curve from 0 to Z: Z=1.0 gives 0.3413; Z=2.0 gives 0.4772)

The probability of negative NPV is about 2.28%. The Z value is (0 minus 40) divided by 20, which is minus 2. The tail area beyond 2 standard deviations is 0.5 minus 0.4772, giving 0.0228.

  1. A2.28%Correct
  2. B15.87%
  3. C34.13%
  4. D47.72%

Explanation

Z = (0 - 40)/20 = -2.0. The area between the mean and 2 standard deviations is 0.4772, so the left-tail probability is 0.5 - 0.4772 = 0.0228, or 2.28%. The 15.87% option wrongly uses Z = 1, and 47.72% is the area from the mean, not the tail.

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