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The Hokie Corporation is considering two mutually exclusive projects. Both require an initial outlay of USD10,000 and will operate for five years. The probability
The Hokie Corporation is considering two mutually exclusive projects. Both require an initial outlay of USD10,000 and will operate for five years. The probability distributions associated with each project for years 1 through 5 are given as follows: Probability Distribution for Cash Flow Years 1-5 (The same cash flow each year) Project A Probability Cash Flow 0.15 USD4,000 0.70 5,000 0.15 6,000 Project B Probability Cash Flow 0.15 USD2,000 0.70 6,000 0.15 10,000 Because project B is the riskier of the two projects, the management of Hokie Coporation has decided to apply a required rate of return of 15% to its evaluation but only a 12% required rate of return to project A. a. Determine the expected value of each project's annual cash flows. b. Determine each project's risk adjusted net present value.
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