Answer to Question #349274 in Financial Math for JAMES

Question

George Drug Products Ltd (GDPL) is faced with several possible investment projects. For each, the total cash outflows required will occur in the initial period. The cash outflows expected net present values and standard deviations are as follows:

Project Cost Sh. ‘000’ Net present value Standard deviations

A 10,000   1,000         2,000

B  5,000             1,000                   3,000

      C               20,000             2,500                  1,000

D                1,000               500                  1,000

E               50,000              7,500                  7,500

All projects have been discounted at a risk-free rate of 8% and it is assumed that the distribution of their possible net present values are normal.

(a) Construct a risk profile for each of these projects n terms of the profitability index     (8 marks)

(b) Ignoring size problems do you find some projects clearly dominated by others? (7 marks)

Answer 1

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