Source: S. B. Block and G. A. Hirt, Foundations of Financial Management, 7th ed., p. 387. McGraw-Hill Companies, Inc., 1994. 6.14 In the book Foundations of Financial Management (7th ed.), Stanley B. Block and Geoffrey A. Hirt discuss a semiconductor firm that is considering two choices: (1) expanding the production of semiconduc- tors for sale to end users or (2) entering the highly competitive home computer market. The cost of both projects is $60 million, but the net present value of the cash flows from sales and the risks are different. Figure 6.3 gives a tree diagram of the project choices. The tree diagram gives a probability distribution of expected sales for each project. It also gives the present value of cash flows from sales and the net present value (NPV = present value of cash flow from sales minus initial cost) corresponding to each sales alternative. Note that figures in parentheses denote losses. a For each project choice, calculate the expected net present value. b For each project choice, calculate the variance and standard deviation of the net present value. c Calculate the coefficient of variation for each project choice. See Exercise 6.12d for a discussion of the coefficient of variation. d Which project has the higher expected net present value? e Which project carries the least risk? Explain. f In your opinion, which project should be under- taken? Justify your answer. 6.15 Five thousand raffle tickets are to be sold at $10 each to benefit a local community group. The prizes, the 6.16 6.17 number of each prize to be given away, and the dollar value of winnings for each prize are as follows: DS Raffle Prize Number to Be Given Away Dollar Value Automobile 1 $20,000 Entertainment center 2 5 50 DVD recorder Gift certificate 3,000 each 400 each 20 each DS Raffle If you buy one ticket, calculate your expected winnings. (Form the probability distribution of x = your dollar winnings, and remember to subtract the cost of your ticket.) A survey conducted by a song rating service finds that the percentages of listeners familiar with "Poker Face" by Lady Gaga who would give the song ratings of 5, 4, 3, 2, and 1 are, respectively, 43 percent, 21 percent, 22 percent, 7 percent, and 7 percent. Assign the numer- ical values 1, 2, 3, 4, and 5 to the (qualitative) ratings 1, 2, 3, 4, and 5 and find an estimate of the probability distribution of x = this song's rating by a randomly selected listener who is familiar with the song. In Exercise 6.16, a Find the expected value of the estimated probabil- ity distribution. b Interpret the meaning of this expected value in terms of all possible "Poker Face" listeners.