Npv

$4

$2

Market value of firm's assets ($20 + NPV)

$24

$22

Firm's asset return standard deviation

40 percent

60 percent

Which project is better? It is obvious that Project A has the higher NPV, but by now you are wary of the change in the firm's asset return standard deviation. One project reduces it, the other increases it. To see which project the stockholders like better, we have to go through our by now very familiar calculations:

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