Question

The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $7,000 and has an expected life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions:

Project A			Project B
Probability	Cash Flows		Probability	Cash Flows
0.2	$6,250		0.2	$0
0.6	7,000		0.6	7,000
0.2	7,750		0.2	18,000

BPC has decided to evaluate the riskier project at 11% and the less-risky project at 10%.

1. What is each project's expected annual cash flow? Round your answers to two decimal places.

   Project A $

   Project B $

   Project B's standard deviation (σ_B) is $5,776 and its coefficient of variation (CV_B) is 0.74. What are the values of (σ_A) and (CV_A)? Round your answer to two decimal places.

   σ_A = $

   CV_A =

plase help!

Thank you!

Answer 1

Project B, coefficient and standard deviation answer given in the question but also below explained how to get it.

A. First find the expected annual cash flows of each project
Project A
probability	cash flows	expected cash flows = (probability X cash flows)
0.2	6250	1250
0.6	7000	4200
0.2	7750	1550
		7000
Project B
probability	cash flows	expected cash flows = (probability X cash flows)
0.2	0	0
0.6	7000	4200
0.2	18000	3600
		7800
Standard deviation and coefficient of variance of Project A
find the deviations from Mean
cash flows	expected cash flows	deviations from Mean (cash flows - expected cash flows)
6250	7000	-750
7000	7000	0
7750	7000	750
now Standard deviation and coefficient of variance of Project A
deviations from Mean	squared deviations from Mean	probability	probability X squared deviations
-750	562500	0.2	112500
0	0	0.6	0
750	562500	0.2	112500
		Variance	225000
		Square root of variance = standard deviations (225000)^0.5	474.3416
		Divide by expected return - Mean	7000
		coefficient of variation	0.067763
Standard deviation and coefficient of variance of Project B
find the deviations from Mean
cash flows	expected cash flows	deviations from Mean (cash flows - expected cash flows)
0	7800	-7800
7000	7800	-800
18000	7800	10200
now Standard deviation and coefficient of variance of Project A
deviations from Mean	squared deviations from Mean	probability	probability X squared deviations
-7800	60840000	0.2	12168000
-800	640000	0.6	384000
10200	104040000	0.2	20808000
		Variance	33360000
		Square root of variance = standard deviations (33360000)^0.5	5776
		Divide by expected return - Mean	7800
		co-coefficient of variation	0.74