Mountain Ski Corp. was set up to take large risks and is willing to take the greatest risk possible. Lakeway Train Co. is more typical of the average corporation and is risk-averse.
|
| Projects | Returns: Expected Value | Standard Deviation | ||||
| A | $ | 294,000 | $ | 197,000 | ||
| B | 767,000 | 430,000 | ||||
| C | 185,000 | 137,000 | ||||
| D | 155,000 | 252,000 | ||||
| a-1. | Compute the coefficients of variation. (Round your answers to 3 decimal places.) |
| Coefficient of Variation | |
| Project A | |
| Project B | |
| Project C | |
| Project D | |
| a-2. | Which projects should Mountain Ski Corp. choose? |
| Project D |
| b. |
Which one of the four projects should Lakeway Train Co. choose based on the same criteria of using the coefficient of variation?
|
| Project B |
Explanation:
| Coefficient of variation (V) = Standard deviation / Expected value |
a-1.
| Project A | $ | 197,000 / $294,000 | = | .670 |
| Project B | $ | 430,000 / $767,000 | = | .561 |
| Project C | $ | 137,000 / $185,000 | = | .741 |
| Project D | $ | 252,000 / $155,000 | = | 1.626 |
a-2.
| Mountain Ski Corp should choose Project D because it has the largest coefficient of variation. |
b.
| Lakeway Train Co. should choose Project B because it has the smallest coefficient of variation. |
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