Inca, Inc. Case 21
Capital Budgeting with Risk
Purpose: The student goes through the statistical procedure of determining risk for investments. Though
one investment alternative provides the higher net present value, is also has a much higher coefficient of
variation and the student must take this into consideration in describing his or her results. The case is
then expanded into six alternatives for which the student is asked to select the lowest risk option.
Relation to Text: This case should follow Chapter 13.
Complexity: This case is straightforward and should require 30-45 minutes to solve.
Solutions
1. Expected value of the net present value (standard)
Outcome Probability Expected Value
$1,050 x .40 = 420
2. Expected value of the net present value (expanded)
Outcome Probability Expected Value
$2,812 x .40 = 1,124.8
3. The expanded size restaurant alternative clearly has the higher net present value. ($1,240,800 vs.
2
4. Standard deviation ( )
Outcome
Expected value
Probability
D D P
D
D
P
= S –
=
=
=
D
–
D
=
( )D D–
2
( )D D–
x
P
=
2
( )D D P–
1,050 632 418 174,724 .40 69,889.6
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