COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The highest standard deviation of net present value.
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The highest coefficient of variation of net present value.
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The highest expected value of net present value.
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The lowest opportunity loss likelihood.
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Detailed explanation-1: -5) The investment proposal with the greatest relative risk would have: the highest standard deviation of net present value.
Detailed explanation-2: -If the IRR is above the discount rate, the project is feasible. If it is below, the project is not. If a discount rate is not known, there is no benchmark to compare the project return against. In cases like this, the NPV method is superior as projects with a positive NPV are considered financially worthwhile.
Detailed explanation-3: -The coefficient of variation (COV) is the ratio of the standard deviation of a data set to the expected mean. Investors use it to determine whether the expected return of the investment is worth the degree of volatility, or the downside risk, that it may experience over time.
Detailed explanation-4: -If a discount rate is not known, or cannot be applied to a specific project for whatever reason, the IRR is of limited value. In cases like this, the NPV method is superior. If a project’s NPV is above zero, then it’s considered to be financially worthwhile.