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Chapter 4: Q1BP (page 438)

Assume you are risk-averse and have the following three choices. Which project will you select? Compute the coefficient of variation for each.

Expected Value Standard Deviation

A \(2,200 \)1,400

B 2,730 1,960

C 2,250 1,490

Short Answer

Expert verified

The coefficient of variation for Part A is computed as 0.655, Part B is computed as 0.718 and part C is computed as 0.662.Project A should be selected.

Step by step solution

01

Computation of coefficient of Part A

Coefficientofvariation=StandardDeviationExpectedvalue=1,4402,200=0.655

02

Computation of coefficient of Part B

Coefficientofvariation=StandardDeviationExpectedvalue=1,9602,730=0.718

03

Computation of coefficient of Part C

Coefficientofvariation=StandardDeviationExpectedvalue=1,4902,250=0.662

04

Selection of project

The project A should be chosen as it has the lowest coefficient of variation, less coefficient of variation means the project has relatively less risk than the other projects.

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Most popular questions from this chapter

Question: Betty Bronson has just retired after 25 years with the electric company. Her total pension funds have an accumulated value of $180,000, and her life expectancy is 15 more years. Her pension fund manager assumes he can earn a 9 percent return on her assets. What will be her yearly annuity for the next 15 years?

What is a deferred annuity?

Your father offers you a choice of \(105,000 in 12 years or \)47,000 today. b. If money is still discounted at 8 percent, but your choice is between \(105,000 in 9 years or \)47,000 today, which should you choose?

Question: Phil Goode will receive $175,000 in 50 years. His friends are very jealous of him. If the funds are discounted back at a rate of 14 percent, what is the present value of his future 鈥減ot of gold鈥�?

What is the present value of

c. $26,000 in 14 years at 6 percent
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