The finance manager of Apr Construction Ltd. has two investment proposals
before him and he wishes to choose one of them. He will choose the project
that offers him a higher expected net present value (NPV). In case both
projects have the same NPV, he will prefer the project that has a lesser risk.
The data for the two projects is given below:
Possible
outcomes
Probability of possible
outcomes
Net present value
Sh. million
Project X:
Pessimistic 0.25 1,500
Most likely 0.50 5,000
Optimistic 0.25 9,000
Project Y:
Pessimistic 0.25 – 10,000
Most likely 0.50 5,000
Optimistic 0.25 20,500
Required:
The project the finance manager would choose, given that risk is measured by
the standard deviation.