The Bartram-Pulley Company (BPC) must decide between two mutually exclusive inve

Question

The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $5,050 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 14% rate and the less risky project at a 8% rate. What is the coefficient of variation (CV) of project B?

Project A Project B Probability Net Cash Flows Probability Net Cash Flows 0.2 $5,000 0.2 $3,000 0.6 7,750 0.6 9,750 0.2 8,500 0.2 18,000

Explanation / Answer

Calculate standard deviation of project B as follows..

36765000

Standard Deviation = square root of 36765000 = 6063.4

CV =6063.4 / 10050 = 0.6033

A B A*B C D A*D P(B) Net CF's Net CF - e(CF) C Square 0.2 3000 600 -9450 89302500 17860500 0.6 9750 5850 -4200 17640000 10584000 0.2 18000 3600 -6450 41602500 8320500 Sum 10050

36765000

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