Recall that the net present value (NPV) is a procedure for evaluating consequenc

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Recall that the net present value (NPV) is a procedure for evaluating consequences that yield cash flows at different points in time. If xi is the cash flow at year i and r is the discount rate, then the NPV is given by: NPV = ? (xi / (1+r)i ) where the summation is over all future cash flows including the current time x0. a. Suppose that you can invest in one of the two different projects. Each costs $20,000. The first project is riskless and will pay you $10,000 each year for the next 3 years. The second one is risky and there is 50% chance that it will pay $15,000 each year for the next 3 years and a 50% chance that it will pay only $5,000 each year for the next 3 years. Your discount rate is 9%. Calculate the NPV for both projects. What can you conclude about the use of NPV for deciding among risky projects? Discuss in terms of risk attitudes b) Now suppose that you have determined that you are risk averse and that your utility function can be presented by U(Xi) = ln(Xi) where Xi is the cash flow during year i. Calculate the net present utility for each project. Are your conclusions different from Part b? Is there anything that the utility function is not capturing

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