Question

The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $5,250 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	17,000

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=$5,444 and CV_B=$0.73.) 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?

   -Select-YesNoItem 10

Answer 1

Project A
1	2	1*2	3	4	1*4
Prob(P)	Cash Flows(A)	Prob CF	A-Amean	(A-Amean)^2	P(A-Amean)^2
0.2	7000	1400	50	2500	500
0.6	6750	4050	-200	40000	24000
0.2	7500	1500	550	302500	60500
	A mean	6950		variance A	85000	Standard Dev A	291.5475947
Project B
1	2	1*2	3	4	1*4
Prob.	Cash Flow	Prob CF	B-Bmean	(B-Bmean)^2	P(B-Bmean)^2
0.2	0	0	-7450	55502500	11100500
0.6	6750	4050	-700	490000	294000
0.2	17000	3400	9550	91202500	18240500
	B mean	7450		variance B	29635000	Standard Dev B	5443.803817

(a) Net cash flow for the projects are:

A-6950

B=7450

Particulars	Project A	Project B
Net Cash Flow(CF)	6950	7450
Initial Investment(II)	5250	5250
NPV(CF-II) (A)	1700	2200
Standard Deviation (B)	292	5444
CV (B/A)	0.17	2.47

coefficient of variation derive by formula = Standard deviation / Net present Value(NPV)

(b) Risk Adjusted NPV of each project

	Project A
	1	2	1*2=3	4	3*4
Yr.	Prob(P)	Cash Flows(A)	Prob CF	PV @11%	PV(CF)
1	0.2	7000	1400	0.9009	1261.2613
2	0.6	6750	4050	0.8116	3287.0709
3	0.2	7500	1500	0.7312	1096.7871
		A mean	6950		5645.1192
	Project A
	1	2	1*2=3	4	3*4
Yr.	Prob(P)	Cash Flows(A)	Prob CF	PV @9%	PV(CF)
1	0.2	7000	1400	0.9174	1284.4037
2	0.6	6750	4050	0.8417	3408.804
3	0.2	7500	1500	0.7722	1158.2752
		A mean	6950		5851.4829
	Project B
	1	2	1*2=3	4	3*4
Yr.	Prob(P)	Cash Flows(A)	Prob CF	PV @11%	PV(CF)
1	0.2	0	0	0.901	0
2	0.6	6750	4050	0.812	3287.0709
3	0.2	17000	3400	0.731	2486.0507
		B mean	7450		5773.1216
	Project B
	1	2	1*2=3	4	3*4
Yr.	Prob(P)	Cash Flows(A)	Prob CF	PV @9%	PV(CF)
1	0.2	0	0	0.917	0
2	0.6	6750	4050	0.842	3408.804
3	0.2	17000	3400	0.772	2625.4238
		B mean	7450		6034.2278

Particulars	Project A @ 9%	Project A @ 11%	Project B @9%	Project B @ 11%
Present Value Cash Flow	5645	5851	5773	6034
Initial Investment	5750	5750	5750	5750
Risk Adjusted NPV	-105	101	23	284