Question

The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial outflow of $6,750 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	$6,500		0.2	$          0
0.6	6,750		0.6	6,750
0.2	7,000		0.2	17,000

BPC has decided to evaluate the riskier project at 12% and the less-risky project at 8%.

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 $5,444 and its coefficient of variation (CV_B) is 0.73. 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

a)Calculation of annual cash flow of Project A

Cash flow(x)	Probability(p)	Annual Cash flow(x*p)
$6500	0.2	6500 x 0.2 = 1300
$6750	0.6	6750 x 0.6 = 4050
$7000	0.2	7000 x 0.2 = 1400
		Total = $6750

Annual cash flow of Project A = $6750

Calculation of annual cash flow of Project B

Cash flow(x)	Probability(p)	Annual Cash flow(x*p)
$0	0.2	0 x 0.2 = 0
$6750	0.6	6750 x 0.6 = 4050
$17000	0.2	17000 x 0.2 = 3400
		Total = $7450

Annual cash flow of Project A = $7450

b) Calculation of standard deviation and CV of project A

Cashflow(x)	Probability(p)	x * p	(x-x̄)	(x-x̄)2	p(x-x̄)2
6500	0.2	1300	-250	62500	12500
6750 (taken as x)	0.6	4050	0	0	0
7000	0.2	1400	250	62500	12500
		6750			Variance = 25000

Mean(x̄) = = = 2250

Standard deviation = √ variance = √25000 = 158

Coefficient of variation =

= 158 / 2250 = 0.070