Question ID: ICMA 10.P2.320

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  • #223834
    Vineetha Nair
    Participant

    Hi Lynn,

    Can you please clarify what is meant by “Project S has the greater relative risk because it has more variation in the probable cash flows”

    Thanks

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  • #223855
    Lynn Roden
    HOCK international

    Hi Vineetha Nair,

    Variation in probable results causes risk, because the more variation there is in the probable cash flows, the greater the risk will be that the actual value will not fall within the anticipated interval.

    For Project S, the lowest probable cash flow is $70,000 and the highest probable cash flow is $150,000. For Project R, the lowest probable cash flow is $75,000 and the highest probable cash flow is $115,000.

    There is more spread between the lowest and the highest probable cash flows for S than there is for R. Therefore, Project S has the greater relative risk because it has more variation in the probable cash flows.

    Lynn

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