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 $18,000 BPC has decided to evaluate the riskier project at 13 and the less risky project at 8 The data has been collected in the Microsoft Excel Online file below Open the spreadsheet and perform the required analysis to answer the questions below Open spreadsheet 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 $5,822 37 and its coefficient of variation (CV B ) is 0 78 What are the values of ( A ) and (CV A ) Round your answers to two decimal places A $ CV A Based on the risk adjusted NPVs, which project should BPC choose Project AProject B If you knew that Project B's cash flows were negatively correlated with the firm's other cash flow, but Project A's cash flows were positively correlated, how might this affect the decision This would make Project B more appealing This would make Project B less appealing 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 This would make Project B more appealing This would make Project B less appealing B C $6,500 00 3 $500 00 A 1 Project risk analysis 2 3 Costs, Projects A and B 4 Expected life of projects (in years) 5 Difference between Project A CFs 6 7 Project A 8 Probability 9 0 2 10 0 6 11 0 2 12 13 Project B 14 Probability 15 0 2 16 0 6 17 0 2 18 Cash Flows $6,000 00 $6,500 00 $7,000 00 Cash Flows $0 00 $6,500 00 $18,000 00 ( A C D 13 00 8 00 Formulas N A N A N A 19 Discount rate, risky project 20 Discount rate, less risky project 21 22 Calculation of Expected CF, SD and CV 23 Project A 24 Expected annual cash flow 25 Standard deviation (SDA) 26 Coefficient of variation (CVA) 27 28 Project B 29 Expected annual cash flow 30 Standard deviation (SDB) 31 Coefficient of variation (CVB) 32 33 Which project is riskier 34 Project A risk adjusted discount rate 35 Project B risk adjusted discount rate N A $9,494 74 DIV 0 N A N A N A N A 37 Calculation of Risk Adjusted NPVs 38 NPVA 39 NPVB 40 Which project should be chosen 41 N A N A

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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

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	$18,000

BPC has decided to evaluate the riskier project at 13% and the less-risky project at 8%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

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 $5,822.37 and its coefficient of variation (CV_B) is 0.78. What are the values of (_A) and (CV_A)? Round your answers to two decimal places.
_A = $

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

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

_________This would make Project B more appealing.This would make Project B less appealing.

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?

_________This would make Project B more appealing.This would make Project B less appealing.

image text in transcribed

B C $6,500.00 3 $500.00 A 1 Project risk analysis 2 3 Costs, Projects A and B 4 Expected life of projects (in years) 5 Difference between Project A CFs 6 7 Project A: 8 Probability 9 0.2 10 0.6 11 0.2 12 13 Project B: 14 Probability 15 0.2 16 0.6 17 0.2 18 Cash Flows $6,000.00 $6,500.00 $7,000.00 Cash Flows $0.00 $6,500.00 $18,000.00 ( A C D 13.00% 8.00% Formulas #N/A #N/A #N/A 19 Discount rate, risky project 20 Discount rate, less risky project 21 22 Calculation of Expected CF, SD and CV: 23 Project A: 24 Expected annual cash flow 25 Standard deviation (SDA) 26 Coefficient of variation (CVA) 27 28 Project B: 29 Expected annual cash flow 30 Standard deviation (SDB) 31 Coefficient of variation (CVB) 32 33 Which project is riskier? 34 Project A risk-adjusted discount rate 35 Project B risk-adjusted discount rate #N/A $9,494.74 #DIV/0! #N/A #N/A #N/A #N/A 37 Calculation of Risk-Adjusted NPVs: 38 NPVA 39 NPVB 40 Which project should be chosen? 41 #N/A #N/A