Question

Problem 11-15 Risky Cash Flows 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 Net Cash Flows Probability Net Cash Flows 0.2 $6,000 0.2 $        0   0.6 6,750 0.6 6,750 0.2 8,000 0.2 16,000 BPC has decided to evaluate the riskier project at a 12% rate and the less risky project at a 8% rate. What is the expected value of the annual net cash flows from each project? Do not round intermediate calculations. Round your answers to nearest dollar. Project A Project B Net cash flow $ $ What is the coefficient of variation (CV)? Do not round intermediate calculations. (Hint:σB=$5,097 and CVB=$0.70.) σ (to the nearest whole number) CV (to 2 decimal places) Project A $ Project B $ What is the risk-adjusted NPV of each project? Do not round intermediate calculations. Round your answer to the nearest dollar. Project A $ Project B $ 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