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Evaluating the riskiness of two capital budgeting projects

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A firm is evaluating the riskiness of two capital budgeting projects. The following table summarizes the NPV & associated (NPV) probabilities for various outcomes of the two projects

                      Net Present Values

Probability                          Project A                    Project B

0.25 (Optimistic)                -$5,000                                 $0

0.50 (Most likely)              $4,000                         $2,000

0.25 (Pessimistic)              $10,000                                 $8,000

Using the above information, the projects can best be characterized relative to one another by the statement

  1. Project A is more risky than Project B
  2. Project B is more risky than Project A
  3. Since Project A has a higher expected NVP, it should be chosen
  4. Since Project B has a higher standard deviation, it is more risky & should not be chosen

Reference no: EM132199984

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