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Risky Cash Flows

The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $7,750 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:

Project A		Project B
Probability	Cash Flows	Probability	Cash Flows
0.2	$6,000	0.2	$ 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 13% rate and the less risky project at a 8% rate.

a. What is the expected value of the annual cash flows from each project? Do not round intermediate calculations. Round your answers to the nearest dollar.

	Project A	Project B
Net cash flow	$	$

b. What is the coefficient of variation (CV)? (Hint: B=$5,798 and CVB=$0.76.) Do not round intermediate calculations. Round values to the nearest cent and CV values to two decimal places.

		CV
Project A	$
Project B	$

c. What is the risk-adjusted NPV of each project? Do not round intermediate calculations. Round your answers to the nearest cent.

Project A		$
Project B		$

d. 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?

This would tend to reinforce the decision to -Select-acceptrejectItem 9 Project B.

If Project B's cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk?