Excel Online Structured Activity:

Project risk analysis The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $7,000 and has an expected life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions:

Project A Project B

Probability Cash Flows Probability Cash Flows

.2 $6,250 0.2 $0

0.6 $7,000 0.6 $7,000

0.2 $7,750 0.2 $19,000

BPC has decided to evaluate the riskier project at 13% and the less-risky project at 8%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

What is each project's expected annual cash flow? Round your answers to two decimal places.

Project A: $ ________________

Project B: $ _________________

Project B's standard deviation (B) is $6,131.88 and its coefficient of variation (CVB) is 0.77. What are the values of (A) and (CVA)? Round your answers to two decimal places.

A = $_________________

CVA = _________________

Based on the risk-adjusted NPVs, which project should BPC choose? ______________________

If you knew that Project B's cash flows were negatively correlated with the firm's other cash flow, but Project A's cash flows were positively correlated, how might this affect the decision? _________________________________

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