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The Hokie Corporation is considering two mutually exclusive projects. Both require an initial outlay of $10,000 and will operate for five years. The probability distributions
The Hokie Corporation is considering two mutually exclusive projects. Both require an initial outlay of $10,000 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 Project B Probability Cash Flow Probability Cash Flow 0.15 $4,000 0.15 $2,000 0.7 5,000 0.7 6,000 0.15 6,000 0.15 10,000 Because Project B is the riskier of the two projects, the management of Hokie Corporation has decided to apply a required rate of return of 15 percent to its evaluation but only a 12 percent required rate of return to project A. a. Determine the expected value of each projects annual cash flows. b. Determine each projects risk-adjusted net present value. c. What other factors might be considered in deciding between these two projects?
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