Asked by Jennah Marie on May 05, 2024
Verified
Project Alpha has an NPV of $10 million and a standard deviation based on risk analysis of $3 million. Project Beta has an NPV of $8 million and a standard deviation based on risk of $2 million. Which project should be selected and why?
A) Select Alpha because it has the higher NPV.
B) Select Beta because it has the lower risk as represented by standard deviation.
C) Select either project because both have positive NPVs and relatively low risk compared to their NPVs.
D) Don't select either project because there is too much risk associated with both projects.
E) There is no clear decision rule, the choice depends on management's degree of risk aversion.
Standard Deviation
A statistical measure that quantifies the amount of variation or dispersion of a set of data values.
Risk Aversion
The premise that most people prefer lower risk investments when expected returns are about equal.
NPV
Net Present Value; a method used in capital budgeting to evaluate the profitability of an investment or project.
- Acquire an understanding of how project risk affects an organization's fiscal well-being and risk posture.
Verified Answer
ZK
Zybrea KnightMay 06, 2024
Final Answer :
E
Explanation :
The choice between Project Alpha and Project Beta depends on management's risk tolerance. Alpha has a higher NPV but also higher risk, while Beta has a lower NPV but also lower risk. There's no absolute rule without considering the organization's risk preferences.
Learning Objectives
- Acquire an understanding of how project risk affects an organization's fiscal well-being and risk posture.
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