JB Consultancy Group has determined relative utilities of cash flows of two forthcoming projects of its client company as follows: Cash Flow in ₹…
CA Final · Advanced Financial Management · RTP · November 2024
JB Consultancy Group has determined relative utilities of cash flows of two forthcoming projects of its client company as follows: Cash Flow in ₹ -150000 -100000 -40000 150000 100000 50000 10000 Utilities -100 -60 -3 40 30 20 10 The distribution of cash flows of project X and Project Y are as follows: Project X Cash Flow (₹) -150000 100000 150000 100000 50000 Probability 0.10 0.20 0.40 0.20 0.10 Project Y Cash Flow (₹) -100000 -40000 150000 50000 100000 Probability 0.10 0.15 0.40 0.25 0.10 Which project should be selected and why?
Suggested Answer and Working Notes:
Evaluation of project utilizes of Project X and Project Y Project X Cash flow (in ₹) Probability Utility Utility value -1,50,000 0.10 -100 -10 -1,00,000 0.20 -60 -12 1,50,000 0.40 40 16 1,00,000 0.20 30 6 50,000 0.10 20 2 2 Project Y Cash flow (in ₹) Probability Utility Utility value -1,00,000 0.10 -60 -6 -40,000 0.15 -3 -0.45 1,50,000 0.40 40 16 50,000 0.25 20 5 1,00,000 0.10 30 3 17.55 Project Y should be selected as its expected utility is more.
Topics: Advanced Capital Budgeting Decisions
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