Question
I am working on the below problem: Problem 11-15 Risky Cash Flows The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each
I am working on the below problem:
Problem 11-15 Risky Cash Flows
The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $7,500 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 | Net Cash Flows | Probability | Net Cash Flows |
0.2 | $7,000 | 0.2 | $ 0 |
0.6 | 6,750 | 0.6 | 6,750 |
0.2 | 8,000 | 0.2 | 20,000 |
BPC has decided to evaluate the riskier project at a 12% rate and the less risky project at a 8% rate.
- What is the expected value of the annual net cash flows from each project? Do not round intermediate calculations. Round your answers to nearest dollar.
Project A Project B Net cash flow $ 7050 $ 8050 (to the nearest whole number) CV (to 2 decimal places) Project A $ 485 .07 Project B $ 6522 .01 - What is the risk-adjusted NPV of each project? Do not round intermediate calculations. Round your answer to the nearest dollar.
Project A $ Project B $
I know my answers to part A are correct but calculations for risk-adjusted NPV are wrong. Here's how I am calculating it. What I am doing wrong?
My equation for NPV =
Project A = NPV(.08, SUM:Year 0 - Year 3 cash flows)+-7500
Project B = NPV(.12, SUM:Year 0- Year 3 cash flows) + -7500
Rate A | 8% | |||||
Rate B | 12% | |||||
0 | 1 | 2 | 3 | NPV | ||
Project A | -7,500 | 7,000.0 | 6,750.0 | 8,000.0 | 11,119 | |
Project B | -7,500 | 0.0 | 6,750.0 | 20,000.0 | 12,117 |
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