In this problem the SD of NPV is 14.3696 using hilliers model when we are doing calculations by rounding off Rupees in lakhs.
But if we take full amounts without rounding off the answer comes to , SD of NPV 4544.07
Which one is correct?
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In capital budgeting, the net present value (NPV) is a measure used to evaluate the profitability of an investment. The NPV is calculated by discounting the expected cash flows at the required rate of return and then subtracting the initial investment. The standard deviation (SD) of NPV is a measure of the risk or variability associated with the expected cash flows.
The Hillier Model is commonly used to estimate the standard deviation of NPV in situations where the cash flows are uncertain and follow a probability distribution. The rounding off of amounts can affect the precision of the calculations and subsequently impact the results.
In your case, you have mentioned that using Hillier’s model with rounded amounts, the standard deviation of NPV is 14.3696. However, when using full amounts without rounding off, the standard deviation is calculated to be 4544.07.
The difference in these results is likely due to the impact of rounding off. When using rounded amounts, the precision of the calculations is reduced, leading to a lower standard deviation. On the other hand, using full amounts without rounding off provides a more precise calculation and a higher standard deviation.
In practice, it is generally recommended to use the most accurate and precise data available. Therefore, using the full amounts without rounding off is likely to be a more accurate representation of the standard deviation of NPV in this scenario. However, it’s essential to note that the choice of rounding off may also depend on the reporting conventions or requirements of the company or industry.
hello,
your attention is invited to my answer and its attachment, for the same question, described as answer to the same question below. And you are requested to provide the clarification on the same.
The Difference is described as follows and detailed in the picture attached:
Now the real question lies, where the course of problems gives us the view that the every figure is expressed as Rs. in Lakhs, though the above answer 14.3696 is not equal to Rs. 14.3696 Lakhs ( reason as discussed above and as detailed in the picture attached ), should we go in the route of ICAI i.e. 14.3696 or get actual answer in actual numbers ?
your attention is requested to answer the above question.