CMA Final · Strategic Financial Management · Evaluation of Risky Proposals for Investment Decisions
Tulsi Auto's project has an expected NPV of Rs 5,00,000 and a standard deviation of Rs 4,00,000. NPV is assumed to be normally distributed. What is the z-value for the NPV of zero, i.e., the point at which the project breaks even?
The z-value is the break-even NPV of zero less the mean of Rs 5,00,000, divided by the standard deviation of Rs 4,00,000. This gives -1.25, negative because zero lies below the expected NPV.
- A-1.25Correct
- B1.25
- C-0.80
- D0.80
Explanation
z = (0 - 5,00,000)/4,00,000 = -1.25. The sign is negative because zero lies below the mean. A positive 1.25 would ignore the direction; 0.80 inverts the ratio.
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