KLM Ltd., is considering taking up one of the two projects-Project-A and Project-B. Both the projects having same life require equal investment of ₹…

3. Calculation of Variance and Standard Deviation Project A Expected Net Cash Flow = (0.10 x 1.10) + (0.20 x 1.30) + (0.40 x 1.50) + (0.20 x 1.70) + (0.10 x 1.90) = 0.11 + 0.26 + 0.60 +0.34 + 0.19 = 1.50 σ² = 0.10(1.10 – 1.50)² + 0.20 (1.30 – 1.50)² + 0.40 (1.50 – 1.50)² + 0.20 (1.70 – 1.50)² + 0.10 (1.90 – 1.50)² = 0.016 + 0.008 + 0 + 0.008 + 0.016 = 0.048 σ = √0.048 = 0.219 Project B Expected Net Cash Flow = (0.10 X 0.90) + (0.25 X 1.30) + (0.30 X 1.70) + (0.25 X 2.10) + (0.10 X 2.50) = 0.09 + 0.325 + 0.51 + 0.525 + 0.25 = 1.70 σ² = 0.1 (0.90 – 1.70)² + 0.25(1.30 – 1.70)² + 0.30 (1.70 – 1.70)² + 0.25 (2.10 – 1.70)² + 0.10(2.50 – 1.70)² = 0.064 + 0.04 + 0 + 0.04 + 0.064 = 0.208 σ = √0.208 = 0.456 To advise which of the two projects should be accepted, keeping in view the risk assumed in relation to the expected return on the investment we shall calculate the Coefficient of Variation as follows: Coefficient of Variation = Standard Deviation Mean Project A = 0.219 1.50 = 0.146 Project B = 0.456 1.70 = 0.268 Advice: Since Project A has lower Coefficient of Variation it has a better the risk-return tradeoff.