Question
WILL GIVE GREAT RATING IF DONE SOON The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $6,250 and has
WILL GIVE GREAT RATING IF DONE SOON
The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $6,250 and has an expected life of 3 years. Annual net cash flows from each project begin 1 year after the initial investment is made and have the following probability distributions:
Project A | Project B | ||
Probability | Cash Flows | Probability | Cash Flows |
0.2 | $7,000 | 0.2 | $ 0 |
0.6 | 6,750 | 0.6 | 6,750 |
0.2 | 8,000 | 0.2 | 20,000 |
BPC has decided to evaluate the riskier project at a 13% rate and the less risky project at a 10% rate.
a)
What is the expected value of the annual cash flows from each project? Do not round intermediate calculations. Round your answers to the nearest dollar.
investment A =
investment B =
b)
What is the coefficient of variation (CV)? (Hint: B=$6,522 and CVB=$0.81.) Do not round intermediate calculations. Round values to the nearest cent and CV values to two decimal places.
CV | ||
Project A | $ | |
Project B | $ |
c)
What is the risk-adjusted NPV of each project? Do not round intermediate calculations. Round your answers to the nearest cent.
Project A | $ | |
Project B | $ |
If it were known that Project B is negatively correlated with other cash flows of the firm whereas Project A is positively correlated, how would this affect the decision?
This would tend to reinforce the decision to -Select-accept-reject-Item 9 Project B.
If Project B's cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk?
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