Question

The financial director of Graceland (Pty) Ltd received the following information in connection with two mutually exclusive projects

Economic conditions	Project 009	Project 005
Most pessimistic	3500	4000
Normal	7000	6000
Most optimistic	9000	10 000

The probability that the most pessimistic cash flows will realise is 30% whilst there is a 20% probability that the most optimistic cash flows will realize.

Required

By using all known methods of determining project risk,indicate which project you would choose

Standard deviation is a better criterion for measuring risk explain with reasons if this statement is true.

Answer 1

I will choose project 005 becasue its standard deviation is less than that of project 009.

Also, project 005 has high cash flow even in pessimistic scenario and its expected return is almost same as 009.

Standard deviation is a better criterion because it calculates the deviation that can happen from average return. How much could be the change from the average return. Less the expected change, better the project and vice-versa. Also it helps in quantifying the change that could happen.