Black & White Enterprises is considering invest­ ing in either of two mutually exclusive projects, X and Y. Project X requires an initial investment of US$30,000; project Y requires US$40,000. Each project's cash inflows are 5­year annuities: Project X's inflows are US$10,000 per year; project Y's are US$15,000. The firm has unlimited funds and, in the absence of risk differences, accepts the project with the highest NPV. The cost of capital is 15 percent.
a. Find the NPV for each project. Are the projects acceptable?
b. Find the breakeven cash inflow for each project.
c. The firm has estimated the probabilities of achieving various ranges of cash inflows for the two projects, as shown in the following table. What is the probability that each project will achieve the breakeven cash inflow found in part b?

d. Which project is more risky? Which project has the potentially higher NPV? Discuss the risk-return tradeoffs of the two projects.
e. If the firm wished to minimize losses (that is, NPV 6 US$0), which project would you recommend? Which would you recommend if the goal was achieving a higher NPV?

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Probability of achieving cash inflow in given range Range of cash inflow Project X Project Y US$0 to USS5,000 USS5,000 to US$7,500 US$7,500 to US$10,000 US$10,000 to US$12,500 US$12,500 to US$15,000 US$15,000 to US$20,000 Above US$20,000 0% 10 60 25 5% 10 15 25 20 15 10