In: Finance
Risky Cash Flows
The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $8,000 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 | Net Cash Flows |
Probability | Net Cash Flows |
0.2 | $5,000 | 0.2 | $ 0 |
0.6 | 6,750 | 0.6 | 6,750 |
0.2 | 7,000 | 0.2 | 19,000 |
BPC has decided to evaluate the riskier project at a 12% rate and the less risky project at a 10% rate.
Project A | Project B | |
Net cash flow | $ | $ |
σ (to the nearest whole number) | CV (to 2 decimal places) | |
Project A | $ | |
Project B | $ |
Project A | $ | |
Project B | $ |
Project B.
If Project B's cash flows were negatively correlated with gross
domestic product (GDP), would that influence your assessment of its
risk?
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