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

Two mutually exclusive projects have these NPV distributions. Project A: mean ₹2,40,000, standard deviation ₹60,000. Project B: mean ₹3,00,000, standard deviation ₹90,000. Judged by risk per unit of expected return, which project is preferable and what is its coefficient of variation?

Project A is preferable with a coefficient of variation of 0.25. Dividing each standard deviation by its mean NPV gives 0.25 for A and 0.30 for B. The lower coefficient of variation shows less risk per rupee of expected return.

  1. AProject A, 0.25Correct
  2. BProject B, 0.30
  3. CProject A, 4.00
  4. DProject B, 0.33

Explanation

CV = standard deviation / mean. Project A: 60,000/2,40,000 = 0.25. Project B: 90,000/3,00,000 = 0.30. The lower CV means less risk per rupee of expected NPV, so A is preferable even though B has the higher mean and standard deviation. Option 3 inverts the ratio for A.

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