2. (Risky Cash Flows) The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $6,750 and has an expected life of 3 years. Annual net cash flows from each project begin 1 year after the initial investment is made and have the following probability distributions: Probability 0.2 Project A Net Cash Flows $6,000 Probability 0.2 Project B Net Cash Flows $ 0 0.6 6,750 0.6 6,750 0.2 7,500 0.2 18,000 BPC has decided to evaluate the riskier project at a 12% rate and the less risky project at a 10% rate. a) What is the expected value of the annual net cash flows from each project? What is the coefficient of variation (CV)? (Hint: 03 = $5,798 and CVg = 0.76.) b) What is the risk-adjusted NPV of each project? c) If it were known that Project B is negatively correlated with other cash flows of the firm whereas Project A is positively correlated, how would this affect the decision? If Project B's cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk? 1 2