PROJECT RISK ANALYSIS

The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $6,500 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
0.2	$6,000		0.2	$0
0.6	6,500		0.6	6,500
0.2	7,000		0.2	19,000

BPC has decided to evaluate the riskier project at 11% and the less-risky project at 8%.

A) 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 $6,185 and its coefficient of variation (CVB) is 0.80. What are the values of (A) and (CVA)? Round your answer to two decimal places.

A = $

CVA =

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

-Select-Project AProject BItem 5

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

-Select-This would make Project B more appealing.This would make Project B less appealing.Item 6

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?