Question

The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $7,500 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	7,500	0.2	15,000

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 cash flows from each project? Do not round intermediate calculations. Round your answers to the nearest dollar.

   	Project A	Project B
   Net cash flow	$	$

   What is the coefficient of variation (CV)? (Hint: σ_B=$4,758 and CV_B=$0.67.) Do not round intermediate calculations. Round σ values to the nearest cent and CV values to two decimal places.

   	σ	CV
   Project A	$
   Project B	$

2. 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		$

3. 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-acceptrejectItem 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?

Answer 1

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.

	Project A	Project B
Net cash flow	$6950.00	$7050.00

What is the coefficient of variation (CV)? (Hint: σ_B=$4,758 and CV_B=$0.67.) Do not round intermediate calculations. Round σ values to the nearest cent and CV values to two decimal places.

	σ	CV
Project A	$291.55	0.04
Project B	$4757.63	0.67

1. What is the risk-adjusted NPV of each project? Do not round intermediate calculations. Round your answers to the nearest cent.

   Project A		$10092.50
   Project B		$9728.19

2. 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 accept Project B because it would reduce risk.

3. If Project B's cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk? This would tend to reinforce the decision to accept Project B because it would reduce risk.