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CS Executive · Corporate Accounting and Financial Management · Capital Budgeting

Two mutually exclusive projects of Kaveri Industries each have expected NPV, and standard deviation of NPV as follows: Project X: expected NPV ₹2,00,000, standard deviation ₹50,000; Project Y: expected NPV ₹3,00,000, standard deviation ₹100,000... Using the coefficient of variation to compare risk per rupee of return, which statement is correct?

Coefficient of variation equals standard deviation divided by expected NPV. Project X gives 50,000/2,00,000 = 0.25 and Project Y gives 1,00,000/3,00,000 = 0.33. Since X has the lower CV, it carries less risk per rupee of expected return and is preferred on this measure.

  1. AProject X is less risky relative to return, as its CV is 0.25 against 0.33 for YCorrect
  2. BProject Y is less risky relative to return, as its CV is 0.25 against 0.33 for X
  3. CBoth have equal CV of 0.25
  4. DProject X has CV of 4 and Y has CV of 3, so Y is less risky

Explanation

CV = standard deviation / expected NPV. X: 50,000/2,00,000 = 0.25. Y: 1,00,000/3,00,000 = 0.33. Lower CV means lower risk per unit of return, so X is preferred on this basis. Option D inverts the ratio.

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