Question 3:

In addition to the recommendation you provided in Question 2, the CFO would like your assessment of the risk and a recommendation regarding the projects. The data provided in the table below is an expanded view of the data for Project 1. Additionally, using the data in Appendices 1 and 2, complete the necessary calculations for a complete risk assessment for project 1. While only a limited amount of information is available for projects 2 and 3, they are highly correlated with project 1. As a result of this high degree of correlation, the CFO believes project 1 can be used as a proxy to describe the risks within projects 2 and 3.

Note: As a matter of practice, management prefers projects with a risk/return profile in the range of .50 to 1.00.

Project Analysis Results	Project 1
Initial Investment	$260,000
Required Rate of Return	10%
NPV-Base case	$46,754
E(NPV)
(NPV)*
IRR	17.09%
MIRR	14.27%
Payback	2.93 years
CV

* Standard deviation of the NPV

Additional information:

1. Our firm typically prefers projects with a payback of 3 years or less.
2. Projects 1 and 3 have non-conventional cash flows.

Annendiv 1 Appendix 2: (In thousands)