Risky Cash Flows The Bartram-Pulley Company (BPC) must decide between two mutual

Question

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: 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? Round your answers to nearest dollar. Project A Project B Net cash flow What is the coefficient of variation (CV)? What is the risk-adjusted NPV of each project? Round your answer to the nearest dollar. 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- Project B. If Project B's cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk?

Explanation / Answer

Project A:
Net cahs flow=(0.2*7000)+(.6*6750)+(.2*7000)=6850
Project B:

Net cash flow=(.2*0)+(.6*6750)+(.2*15000)= 7050

std of project A=[[(7000-mean)^2*.2]+[(6750-mean)^2*.2]+[(7000-mean)^2*.2]]^.5
mean=(7000+6750+7000)/3=$6916.67
=139.44

std of project B=[[(000-mean)^2*.2]+[(6750-mean)^2*.2]+[(15000-mean)^2*.2]]^.5
mean=(000+6750+15000)/3=$6916.67
=4761.83

CV of project A= std/mean
=49.6
CV of project B=std /mean
=4761.83

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