Question
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
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 | $6,500 | 0.2 | $0 | |
0.6 | $7,000 | 0.6 | $7,000 | |
0.2 | $7,500 | 0.2 | $18,000 |
BPC has decided to evaluate the riskier project at 11% and the less-risky project at 10%.
Open spreadsheet
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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 $5,775.81 and its coefficient of variation (CVB) is 0.74. What are the values of (A) and (CVA)? Round your answers to two decimal places.
A = $
CVA =
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Based on the risk-adjusted NPVs, which project should BPC choose?
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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.
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