Question

The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial outflow of $6,500 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	$5,750		0.2	$          0
0.6	6,500		0.6	6,500
0.2	7,250		0.2	19,000

BPC has decided to evaluate the riskier project at 12% and the less-risky project at 10%.

1. What is each project's expected annual cash flow? Round your answers to the nearest cent.

   Project A:	$
   Project B:	$

   
   Project B's standard deviation (σ_B) is $6,185 and its coefficient of variation (CV_B) is 0.80. What are the values of (σ_A) and (CV_A)? Do not round intermediate calculations. Round your answer for standard deviation to the nearest cent and for coefficient of variation to two decimal places.

   σA:	$
   CVA:

Answer 1

1). Calculating the project's expected Annual Cash flows:-

Prob (P)	Project A's Cash flows (A)	Project B's Cash flows (B)	Project's Expected Cash flows [(P)*(A)]	Project's Expected Cash flows [(P)*(B)]
0.20	5750.00	0.00	1150.00	0.00
0.60	6500.00	6500.00	3900.00	3900.00
0.20	7250.00	19000.00	1450.00	3800.00
	Expected Annual cash flows	6500.00	7700.00

So, each project's expected annual cash flow:-

Project A:	$ 6500
Project B:	$ 7700

-

Prob (P)	Project A's Cash flows (A)	(P)*(A)	Deviation        [R-E(A)]	[R-E(C)]^2	{[R-E(C)]^2}*(P)
0.20	5750.00	1150.00	-750.00	562500.00	112500.00
0.60	6500.00	3900.00	0.00	0.00	0.00
0.20	7250.00	1450.00	750.00	562500.00	112500.00
		E(A)=6500			225,000.00

-Standard deviation of Project A

So, Standard Deviation of Project A (σA) = $ 474.34

- Coefficient of variation = Standard Deviation/Expected Annual Cash flows

= $474.34/$6500

CVA = 0.07

Note- Answer is been provided for the Questions asked.