Question

Risky Cash Flows

The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $8,000 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	Net Cash Flows	Probability	Net Cash Flows
0.2	$6,000	0.2	$        0
0.6	6,750	0.6	6,750
0.2	8,000	0.2	19,000

BPC has decided to evaluate the riskier project at a 11% rate and the less risky project at a 9% rate.

1. What is the expected value of the annual net cash flows from each project? Do not round intermediate calculations. Round your answers to nearest dollar.

   	Project A	Project B
   Net cash flow	$	$

   
   What is the coefficient of variation (CV)? Do not round intermediate calculations. (Hint: σ_B=$6,158 and CV_B=$0.78.)

   	σ (to the nearest whole number)	CV (to 2 decimal places)
   Project A	$
   Project B	$

2. 
   
3. What is the risk-adjusted NPV of each project? Do not round intermediate calculations. Round your answer to the nearest dollar.

   Project A		$
   Project B		$

4. 
   
5. 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-acceptreject Project B.
   
   If Project B's cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk?
   -Select-YesNo

Answer 1