Question

Assume that you are risk averse and have the following three choices.  

	Expected Value			Standard Deviation
A	$	1,830		$	970
B		2,760			1,850
C		1,680			1,330

  

a. Compute the coefficient of variation for each choice. (Round the final answers to 2 decimal places.)

Projects	Coefficient of variation
A
B
C

b. Which project would you select?

• Project B

• Project C

• Project A

You are asked to evaluate the following two projects for Boring Corporation. Use a discount rate of 13 percent. Use Appendix B.

Project X (DVDs of the Weather Reports) ($18,000 Investment)						Project Y (Slow-Motion Replays of Commercials) ($38,000 Investment)
Year		Cash Flow				Year		Cash Flow
1			$9,000			1			$19,000
2			7,000			2			12,000
3			8,000			3			13,000
4			7,600			4			15,000

a. Calculate the profitability index for project X. (Round "PV Factor" to 3 decimal places. Round the final answer to 2 decimal places.)

PI             

b. Calculate the profitability index for project Y. (Round "PV Factor" to 3 decimal places. Round the final answer to 2 decimal places.)

PI             

c. Using the NPV method combined with the PI approach, which project would you select? Use a discount rate of 13 percent.

• Project Y

• Project X

Answer 1

1]

a]

Coefficient of variation = standard deviation / expected value

b]

Project A would be selected as it has the lowest coefficient of variation

The calculations are below :

The calculations are below :

Project A would be selected as it has the lowest coefficient of variation

Project A would be selected as it has the lowest coefficient of variation