Two investments have the following expected returns (net present value) and standard deviation of returns:

Project

Expected Returns

Standard Deviation

A

$50,000

$40,000

B

$250,000

$125,000

Which among the two projects is riskier and why? Explain their relationship.

A company has been offered a contract to supply private-Label food processors to a regional store chain. The investment required for this project is $1million.It is expected to produce annual net cash flows of $290,000 for a period of five years.The company's cost of capital is 12 percent.

(i) Should the company accept the contract under the circumstances?

(ii) The project is considered to be of average risk and the company subjectively considers a risk premium of 3 percent.

(iii) Is the project viable in the environment of risk?