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 Bs cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk?

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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 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 0.2 0.6 0.2 Cash Flows $6,000 6.750 7,500 Probability 0.2 Cash Flows $0 6,750 18,000 0.6 0.2 BPC has decided to evaluate the riskier project at a 12% rate and the less risky project at a 10% rate. a. What are the expected values of the annual cash flows from each project? What is the coefficient of variation (CV) for each project? (Hint: ob = $5,798 and CVB = 0.76.) Answert Expected CFA = $6,750 Expected CFB = $7,650 CVA = 0.0703. b. What is the risk-adjusted NPV of each project? Answet NPVA = $10,036; NPVB = $11,624