The Bartram-Pulley Company (BPC) must decide between two mutually exclusive inve
ID: 2770422 • Letter: T
Question
The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment 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:
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 risk-adjusted NPV of each project? Round your answer to the nearest dollar.
PROJECT A PROJECT B Probability Net CashFlow Probability Net Cash
Flow 0.2 $7,000 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 risk-adjusted NPV of each project? Round your answer to the nearest dollar.
Project A $ Project B $Explanation / Answer
Project A
E(NPV) = (.2)*(7,000) (.6)*(6,750) (.2)*(8,000) = 7,050
Project B E(NPV) = (.2)*(0) (.6)*(6,750) (.2)*(16,000) =7,250
Year
Project A
Project B
0
-6750
-6750
1
7050
7250
2
7050
7250
3
7050
7250
WACC
8%
12%
Risk Adj. NPV
$11,418.74
$10,663.28
Year
Project A
Project B
0
-6750
-6750
1
7050
7250
2
7050
7250
3
7050
7250
WACC
8%
12%
Risk Adj. NPV
$11,418.74
$10,663.28
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