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

Meera Industries has a project with expected NPV of Rs 40 lakh and standard deviation of NPV of Rs 25 lakh. Assuming NPV is normally distributed, what is the probability that the NPV will be negative? (Area under the normal curve from 0 to z=1.60 is 0.4452.)

The probability of a negative NPV is 5.48%. The standardised value is (0 - 40)/25 = -1.60, the area from the mean to that point is 0.4452, so the tail beyond it is 0.5 - 0.4452 = 0.0548.

  1. A5.48%Correct
  2. B4.52%
  3. C44.52%
  4. D94.52%

Explanation

z = (0 - 40)/25 = -1.60. Probability NPV < 0 = 0.5 - 0.4452 = 0.0548, i.e. 5.48%. 44.52% is only the area between the mean and zero, not the tail. 94.52% adds instead of subtracting and gives the probability of a positive NPV on the wrong side.

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