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The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial after-tax cash outflow of $6,750 and has an expected
The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial after-tax cash outflow of $6,750 and has an expected life of 3 years. Annual project after-tax 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 | 6,750 | 0.6 | 6,750 | |
0.2 | 7,000 | 0.2 | 18,000 |
BPC has decided to evaluate the riskier project at 11% and the less-risky project at 9%.
- What is each project's expected annual after-tax cash flow? Round your answers to the nearest cent.
Project A: $ Project B: $ A: $ CVA: - Based on the risk-adjusted NPVs, which project should BPC choose? -Select-Project AProject BItem 5
- If you knew that Project B's cash flows were negatively correlated with the firm's other cash flows, but Project A's cash flows were positively correlated, how might this affect the decision? -Select-This would make Project B more appealing.This would make Project B less appealing.Item 6 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? -Select-This would make Project B more appealing.This would make Project B less appealing.
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