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?

Question

Quizplus · Accepted Answer

To determine the best project, we need to calculate the expected net present value (ENPV) and consider the risk associated with each project. 
Project 1: 
ENPV = (0.4 x 64,000) + (0.4 x 78,000) + (0.2 x 95,000) = $79,200 
Standard deviation = $16,164 
Project 2: 
ENPV = (0.3 x 55,000) + (0.6 x 105,000) + (0.1 x 110,000) = $89,500 
Standard deviation = $32,314 
Project 3: 
ENPV = (0.2 x 75,000) + (0.5 x 90,000) + (0.3 x 105,000) = $90,000 
Standard deviation = $21,394 
Based on the calculations, Project 3 has the highest ENPV and the lowest standard deviation, making it the best project to undertake. Therefore, the answer is B.

Etienne Electronics Is Appraising Three Projects