Cyber Company is considering two mutually exclusive projects. Investment outlay of both the projects is 5,00,000 and each is expected to have a life…

CA Final · Advanced Financial Management · MTP · January 2026
Cyber Company is considering two mutually exclusive projects. Investment outlay of both the projects is 5,00,000 and each is expected to have a life of 5 years. Under three possible situations their annual cash flows and probabilities are as under: Situation Probabilities Cash Flow (₹) Project A Project B Good 0.3 6,00,000 5,00,000 Normal 0.4 4,00,000 4,00,000 Worse 0.3 2,00,000 3,00,000 The cost of capital is 7 per cent, which project should be accepted? Explain with workings.

Suggested Answer and Working Notes:

Project A Expected Net Cash flow (ENCF) 0.3 (6,00,000) + 0.4 (4,00,000) + 0.3 (2,00,000) = 4,00,000 σ²=0.3 (6,00,000– 4,00,000)² + 0.4 (4,00,000 – 4,00,000)² + 0.3 (2,00,000 – 4,00,000)² σ = √24,00,00,00,000 σ = 1,54,919.33 Present Value of Expected Cash Inflows = 4,00,000 × 4.100 = 16,40,000 NPV = 16,40,000 – 5,00,000 = 11,40,000 Project B ENCF = 0.3 (5,00,000) + 0.4 (4,00,000) + 0.3 (3,00,000) = 4,00,000 σ²=0.3 (5,00,000 – 4,00,000)² + 0.4 (4,00,000 – 4,00,000)² + 0.3 (3,00,000 – 4,00,000)² σ = √6,00,00,00,000 σ = 77,459.66 Present Value of Expected Cash Inflows = 4,00,000 × 4.100 = 16,40,000 NPV = 16,40,000 – 5,00,000 = 11,40,000 Recommendation: NPV in both projects being the same, the project should be decided on the basis of standard deviation and hence project 'B' should be accepted having lower standard deviation, means less risky.

Topics: Advanced Capital Budgeting Decisions

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