Midland is a successful nursery, is considering several expansion projects. All the alternatives promise to produce an acceptable return. Data on four possible projects follow. Project Expected return Range Standard deviation A 12.0% 4.0% 2.9% B 12.5 5.0 3.2 C 13.0 6.0 3.5 D 12.8 4.5 3.0 Which project is least risky, judging on the basis of range? Which project has the lowest standard deviation? Explain why standard deviation may not be an entirely appropriate measure of risk for purposes of this comparison. Calculate the coefficient of variation for each project. Which project do you think Greengage’s owners should choose? Explain why.
Midland is a successful nursery, is considering several expansion projects. All the alternatives promise to produce an acceptable return. Data on four possible projects follow. Project Expected return Range Standard deviation A 12.0% 4.0% 2.9% B 12.5 5.0 3.2 C 13.0 6.0 3.5 D 12.8 4.5 3.0 Which project is least risky, judging on the basis of range? Which project has the lowest standard deviation? Explain why standard deviation may not be an entirely appropriate measure of risk for purposes of this comparison. Calculate the coefficient of variation for each project. Which project do you think Greengage’s owners should choose? Explain why.
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 24P
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Question
Midland is a successful nursery, is considering several expansion projects. All the alternatives promise to produce an acceptable return. Data on four possible projects follow.
|
Project |
Expected return |
Range |
Standard deviation |
|
|
|
|
|
|
|
|
|
|
A |
12.0% |
4.0% |
2.9% |
||
|
B |
12.5 |
5.0 |
3.2 |
|
|
|
C |
13.0 |
6.0 |
3.5 |
|
|
|
D |
12.8 |
4.5 |
3.0 |
|
|
- Which project is least risky, judging on the basis of range?
- Which project has the lowest standard deviation? Explain why standard deviation may not be an entirely appropriate measure of risk for purposes of this comparison.
- Calculate the coefficient of variation for each project. Which project do you think Greengage’s owners should choose? Explain why.
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