The Totally Tubular Tube Company wishes to evaluate three new investment proposals. The firm is

QUESTION

The Totally Tubular Tube Company wishes to evaluate three new investment proposals. The firm is concerned with the impact of the proposals on its total risk. Consequently, it has determined expected values and standard deviations of the probability distributions of possible net present values for the possible combinations of existing projects, E, and investment proposals under consideration:COMBINATIONEXPECTED VALUE OFNET PRESENT VALUE(in millions)STANDARDDEVIATION(in millions)E$6.50$5.25E + 16.805.00E + 27.608.00E + 37.206.50E + 1 + 27.907.50E + 1 + 37.505.60E + 2 + 38.308.50E + 1 + 2 + 38.609.00Which combination do you feel is most desirable? Which proposals should be accepted? Which should be rejected?
To find out the desirability of an investment proposal from the available data we need to calculate the Coefficient of variation for all the investment proposals, Combination EXPECTED VALUE OF NET PRESENT VALUE (in million $) STANDARDDEVIATION (in million $) Coefficient of Variation = (Standard Deviation/Expected value of Net Present Value)*100 E 6.50 5.25 80.76923077 E + 1 6.8 5 73.52941176 E + 2 7.6 8 105.2631579 E + 3 7.2 6.5 90.27777778 E + 1 + 2 7.9 7.5 94.93670886 E + 1 + 3 7.5 5.6 74.66666667 E + 2 + 3 8.3 8.5 102.4096386 E + 1 + 2 + 3 8.6 9 104.6511628 So from the available data, the best combination is (E+1), as here the returns are maximum while the risk associated with the proposal is lesser than its returns. Again to judge the combinations that are best suited for getting

an acceptance nod are [(E), (E+1), (E+3), (E+1+2), (E+1+3)]. (All the proposals are accepted as the risk associated with the combination are lesser than its return and for 1% change in the returns of these combinations the risk is lower than it). The remaining combinations that are riskier and must be rejected are; [(E+2), (E+2+3), (E+1+2+3)]. (All proposals are rejected as the risk associated with the combination is higher than its return and for 1% change in the returns of these combinations the risk is greater than it).

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