April\'s Stationary and Gift Store is considering two different lines of housewa

Question

April's Stationary and Gift Store is considering two different lines of housewares. The probability distributions of free cash flows in each year associated with the two projects are:
Project A Project B
Probability Outcome Probability Outcome
.25 $4,000 .25 $3,000
.50 $8,000 .50 $6,000
.25 $12,000 .25 $9,000

Both projects will require an initial outlay of $13,000 and will have an estimated life of six years. Project A is considered a riskier investment and will have to have an adjusted required rate of return of 15%, while Project B's required rate of return is 12%.

b. Determine each projects risk-adjusted net present value

Please show work

Explanation / Answer

Expected CF od Proj A = 0.25*4000+0.5*8000+0.25*12000 = 8000 RateA= 15% So NPV of Proj A = NPV(Rate,CF1...Cf6) + CF0 ie NPVA = NPV(15%,8000,8000,8000,8000,8000,8000) - 13000 = $17,276 Expected CF od Proj B = 0.25*3000+0.5*6000+0.25*9000 = 6000 RateB = 12% NPV of Proj B = NPV(12%,6000,6000,6000,6000,6000,6000) -13000 = $11,668

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