ACCA FM · Chapter 9 · Question 8 of 8
Which of the following is a limitation of using expected NPV to decide whether to accept a one-off project?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) The expected value may not correspond to any outcome that can actually occur, and it ignores the spread of possible outcomes
Explanation
An expected value is a long-run average, which is most meaningful when a decision is repeated many times. For a one-off project the actual outcome will be one of the possible results, not the average, and the expected value conceals the risk of a large loss. It also relies on subjective probability estimates.
More Risk and uncertainty in investment appraisal MCQs
- Q2In sensitivity analysis, what does the maximum cost of capital at which a project remains acceptable equal?
- Q3A project has the following possible NPVs: -$20,000 with probability 0.3, $40,000 with probability 0.5 and $90,000 with probability 0.2…
- Q4Which of the following correctly distinguishes risk from uncertainty in investment appraisal?
- Q5Which of the following is a limitation of sensitivity analysis?
- Q6A project costs $70,000 now. The year 1 cash inflow will be $50,000 (probability 0.6) or $30,000 (probability 0.4). Independently, the…