Your company asked you to evaluate two potential projects. These projects are active for 10 years and have no salvage life. Both have the same upfront costs, but the revenue stream from each of the projects is subject to variation, so risk is involved.

You are given the following information:

Firm�s cost of capital: 10%

Each project will require three years of investment before revenues are generated.

The following cost distribution is given:

	Probability of Outcome	Year 1 Investment Costs	Year 2 Investment Costs	Year 3 Investment Costs	Expected Annual Revenues in Year 4	Expected Rate of Increase in Annual Revenues
Project 1
Outcome A	20%	$1,000	$2,000	$1,000	500	2%
Outcome B	40%	$1,000	$2,000	$1,000	650	3%
Outcome C	40%	$1,000	$2,000	$1,000	850	4%
Project 2
Outcome A	10%	$1,000	$2,000	$1,000	675	2%
Outcome B	50%	$1,000	$2,000	$1,000	700	2.40%
Outcome C	40%	$1,000	$2,000	$1,000	725	2.80%

1. What is the expected value of the NPV for each of the projects?

2. What is the standard deviation of the NPV for each of the projects?

3. What is the coefficient of variation of the NPV for each of the projects?

4. Which project has a higher expected return? Which has more risk?

5. Which one would you recommend to your company? How does its attitude toward risk affect your answer?

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