The answer choices provided describe four different investments. Which answer choice describes the investment with the least amount of risk?
a. Standard deviation = $600, expected return = $400
b. Standard deviation = $500, expected return = $800
c. Standard deviation = $450, expected return = $4,500
d. Standard deviation = $400, expected return = $5,000
2. Harmony Industries uses the following table of risk-adjusted discount rates to analyze projects.
coefficient of variation . Discount rate
0-25......................................6%
.26-.50..................................8
.51-.75.................................10
.76-1.00...............................14
1.01-1.25............................20
The company is considering a $70,000 project. The coefficient of variation for the project is 0.847. Assume that the project generates the following cash flows:
Year cash flows
1...............$11,000
2.................16,000
3................21,000
4..................24,000
5..................30,000
Select the appropriate discount rate and compute the net present value. Should the project be undertaken?
a. The project should not be undertaken because the NPV is -$2,987.
b. The project should be undertaken because the NPV is $1,870.
c. The project should be undertaken because the NPV is $3,457.
d. The project should not be undertaken because the NPV is -$4,096.