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
0.2	$6,750		0.2	$0
0.6	7,000		0.6	7,000
0.2	7,250		0.2	17,000

BPC has decided to evaluate the riskier project at 13% and the less-risky project at 8%.

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 $5,426 and its coefficient of variation (CVB) is 0.71. What are the values of (A) and (CVA)? Round your answer to two decimal places.

A = $

CVA =

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

-Select-Project AProject BItem 5

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?

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