Question

The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial outflow of $6,500 and has an expected life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions: Project A Project B Cash Flows Probability Cash Flows Probability $5,750 $ 0.2 0.2 0 6,500 0.6 0.6 6,500 19,000 0.2 7,250 0.2 BPC has decided to evaluate the riskier project at 13% and the less-risky project at 8% a. What is each project's expected annual cash flow? Round your answers to the nearest cent. $ Project A: Project B: $ Project B's standard deviation (oB) is $6,185 and its coefficient of variation (CVB) is 0.80. What are the values of (oA) and (CVA)? Do not round intermediate calculations. Round your answer for standard deviation to the nearest cent and for coefficient of variation to two decimal places. OA: CVA: b. Based on their risk-adjusted NPVS, which project should BPC choose? Project A c. If you knew that Project B's cash flows were negatively correlated with the firm's other cash flow, whereas Project A's flows were positively correlated, how might this affect the decision? This would make Project B more appealing. If Project B's cash flows were negatively correlated with gross domestic product (GDP), while A's flows were positively correlated, would that influence your risk assessment? This would make Project B less appealing.

Answer 1

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- 2x Wrap Text General 1 - 3 3 Cell Styles Insert Delete Format Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Cells IQ IR STATS - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri -11AA = = = Dr Wrap Text Ea Copy Paste B I Format Painter U B- A Merge & Center - $ -% Conditional . Format Formatting as Table Clipboard Font Alignment Number Styles 1J131 J IK ILIM IN 10 131 132 PROJECT A STATE PROB RETURN EXPECTED VARIANCE 133 (R) RETURN PROB*(R-E(R))^2 134 A*B 135 0.2 5750 1150 112500 136 0.6 6500 3900 137 3 0.2 7250 1450 112500 138 (E(R)= 6500 139 VARIANCE 225000 140 STANDARD DEVIATION 474.34 141 142 PROJECT B STATE PROB RETURN EXPECTED VARIANCE 143 (R) RETURN PROB*(R-E(R)^2 144 AB 145 0.2 0 0 11858000 146 2 0.6 6500 3900 864000 147 3 19000 3800 25538000 148 (E(R) = 7700 149 VARIANCE 38260000 STANDARD DEVIATION 6185.47 151 P V FV DIVIDEND EMV MEAN STDV assignment DEAR Sheet2 COV TIME SERIES corr REGRESSION range CAMERA Rea ferences 0.2 150 H TREND freg_MATRIX INTERVAL, NORMAL HYPOTHI 20J 120% + 9 . * 40 ENG 28-11-2019 ...B

X 2 E. Insert = Page Layout STATS - Microsoft Excel (Product Activation Failed) Add-Ins File Home Formulas Data Review View - 2x % Cut m Find & Conditional Format Formatting as Table Styles Cell Styles Insert Delete Format Σ AutoSum : A Fill 2 Sort & Clear Filter Editing Select Cells 1Q IR 7700 Calibri -11AA = = = Dr Wrap Text General E Copy Paste Format Painter B I U B- A Merge & Center - $ -% . Clipboard Font Alignment Number 1152 Fax DJ IKILIM IN 10 152 153 ANS a PROJECT A PROJECT B 154 EXPECTED ANNUAL CASH FLOW 6500 155 156 SD PROJECT A 474.34 157 CV PROJECT A 0.07 474.34/6500 158 159 ANS b NPV (A) = PV OF CFAT - INVESTMENT 160 7000 X PVIFA @ 8%, 3 YEARS - 6500 161 (7000 X 2.577097) - 6500 11539.68 162 163 NPV (B) PV OF CFAT - INVESTMENT 164 7700 X PVIFA @ 13%, 3 YEARS - 6500 165 (7700 X 2.361153) - 6500 11680.88 166 167 BASED ON RISK ADJUSTED NPVS, COMPANY SHOULD SELECT PROJECT B 168 169 ANSC (0) PROJECT B IS MORE APPEALING 170 (ii) STILL, PROJECT B IS MORE APPEALING 171 172 P V FV DIVIDEND EMV MEAN STDV assignment DEAR Sheet2 COV TIME SERIES corr REGRESSION Red ferences NOTE PVIFA @8%, 3 YEARS PVIFA @13%, 3 YEARS 2.577097 2.361153 H range CAMERA TREND freg_MATRIX INTERVAL, NORMAL HYPOTHI BOJ 120% - 9 * 10 ENG _ + . B 28-11-2019