The Butler-Perkins Company (BPC) must decide between two mutually exclusive inve

Question

The Butler-Perkins Company (BPC) must decide between two mutually exclusive investment<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

projects. Each project costs $6,750 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:

BPC has decided to evaluate the riskier project at a 12 percent rate and the less risky project at a 10 percent rate.(Project B is the riskier one, and A is less).

Required

What is the risk-adjusted NPV of each project?

(I have already know the answer is: NPVA = $10036.25 ; NPVB = $11624.01. I need to know how to calculate it. Please, Do not copy the old answer.)

Explanation / Answer

Hi,

Please find the answer as follows:

Project A

Expected cash flows = 6000*.2 + 6750*.6 + 7500*.2 = 6750

NPV (A) = -6750 + 6750/(1+.10)^1 + 6750/(1+.10)^2 + 6750/(1+.10)^3 = 10036.25

Project B:

Expected cash flows = 0*.2 + 6750*.6 + 18000*.2 = 7650

NPV (B) = -6750 + 7650/(1+.12)^1 + 7650/(1+.12)^2 + 7650/(1+.12)^3 = 11624.01

Thanks.

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