Etienne Electronics Is Appraising Three Projects

question 35

Multiple Choice

Etienne Electronics is appraising three projects. Project 1 has a NPV of $64,000 with a 40% probability of occurrence; $78,000 with a 40% probability; and $95,000 with a 20% probability. Project 2 has an NPV of $55,000 and probability of 30%; $105,000 with a probability of 60% and $110,000 with a probability of 10%. Project 3 has an NPV of $75,000 and probability of 20%; $90,000 and probability of 50%, and $105,000 with a probability of occurrence of 30%. Which project should Etienne Electronics undertake?

• A) Project 1 as it has the highest return with an ENPV of $94.5 million and a similar risk as the other two projects.
• B) Project 3 as it has the highest return, $91.5 million and lowest risk, a standard deviation of $21.4 million.
• C) Project 1 as it has the highest return $85.4 and lowest risk, a standard deviation of $24.5 million.
• D) No decision can be made as Project 3 has the highest return and a higher risk than the other two projects.
• E) Project 2 as it has the highest return $98 million, and lowest risk, a standard deviation of $45.6 million.

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