Question 5.A.18: Refer back to Example 5.6. Which project should be chosen an...

Financial Management for Decision Makers

Refer back to Example 5.6. Which project should be chosen and why? (Assume the possible outcomes are normally distributed.)

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We can see from our earlier calculations that the Cable and Satellite projects have an identical expected net present value. However, the Cable project has a much lower standard deviation, indicating less variability of possible outcomes. Applying the decision rule mentioned above, this means that the Cable project should be selected; or to put it another way, a risk-averse investor would prefer the Cable project as it provides the same expected return for a lower level of risk.

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