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Risky Cash Flows The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $6,000 and has an expected life of

Risky Cash Flows

The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $6,000 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 $5,000 0.2 $ 0
0.6 6,750 0.6 6,750
0.2 8,000 0.2 16,000

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

  1. What is the expected value of the annual net cash flows from each project? Round your answers to nearest dollar.
    Project A Project B
    Net cash flow $ $
    What is the coefficient of variation (CV)? (Hint: B = $5,097 and CVB = 0.70.)
    (to the nearest whole number) CV (to 2 decimal places)
    Project A $
  2. What is the risk-adjusted NPV of each project? Round your answer to the nearest dollar.
    Project A $
    Project B $
  3. 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? This would tend to reinforce the decision to _____ project B If Project B's cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk? -Select-YesNoItem 8

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