Question
A company is considering two mutually exclusive projects. Each of these projects requires an initial outlay of 3,000,000 and will operate for five years. The
A company is considering two mutually exclusive projects. Each of these projects requires an initial outlay of 3,000,000 and will operate for five years. The probability distributions associated with each project for years 1 through 3 are given as follows:
Probability Distribution for Cash Flow : (the same cash flow each year)
Project XY | Project YZ | ||
Probability | Cash Flow | Probability | Cash Flow |
20% | 1,250,000 | 20% | 750,000 |
60% | 1,500,000 | 60% | 1,750,000 |
20% | 1,750,000 | 20% | 2,750,000 |
Because Project YZ is the riskier of the two projects, the management of XYZ Corporation has decided to apply a required rate of return of 16 percent to its evaluation but only 14 percent required rate of return to Project XY.
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