Question

Excel Online Structured Activity: Project risk analysis The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $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 Probability Project B Cash Flows $6,000 $6,500 $7,000 Probability Cash Flows 0.2 0.6 0.2 0.2 0.6 0.2 $0 $6,500 $18,000 BPC has decided to evaluate the riskier project at 12% and the less-risky project at 10%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below What is each project's expected annual cash flow? Round your answers to two decimal places. Project A: Project B: $

Answer 1

Project A				Project B
Probability	Cash Flows	Probable cash flows		Probability	Cash Flows	Probable cash flows
0.2	6000	1200		0.2	0	0
0.6	6500	3900		0.6	6500	3900
0.2	7000	1400		0.2	18000	3600
	NPV=	6500			NPV=	7500

?_A= [(0.2)(6000-6500)² + (0.6)(6500-6500)²+ (0.2)(7000-6500)²]= 500

CVA = 500/6500=0.076

BPC should choose Project B because it has a higher NPV compared to A

If Project B being negatively correlated be known, then Project B would be less risky. This would lead to the acceptance of Project B. if it is negatively correlated it would indicate that it would be profitable when the economy is down, thus means less risky and acceptance of the said project to reinforced