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
Probability	Cash Flows		Probability	Cash Flows
0.2	$6,000		0.2	$ 0
0.6	6,500		0.6	6,500
0.2	7,000		0.2	17,000

BPC has decided to evaluate the riskier project at 13% and the less-risky project at 10%.

1. 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 (σ_B) is $5,464 and its coefficient of variation (CV_B) is 0.75. What are the values of (σ_A) and (CV_A)? Do not round intermediate calculations. Round your answer for standard deviation to the nearest cent and for coefficient of variation to two decimal places.

   σA:	$
   CVA:

2. 
   
3. Based on their risk-adjusted NPVs, which project should BPC choose?
   -Select-Project A or B
4. 
   
5. 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?
   -Select-This would make Project B more appealing. This would make Project B less 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?
   -Select-This would make Project B more appealing. This would make Project B less appealing.

Answer 1

1.
=0.2*6000+0.6*6500+0.2*7000
=6500.00

2.
=0.2*0+0.6*6500+0.2*17000
=7300.00

3.
=sqrt(0.2*(6000-6500)^2+0.6*(6500-6500)^2+0.2*(7000-6500)^2)
=316.2278

4.
=316.2278/6500
=0.0487

5.
Choose Project B
NPV of A=-6500+6500/10%*(1-1/1.1^3)
=9664.5379

NPV of B=-6500+7300/13%*(1-1/1.13^3)
=10736.4140

6.
This would make Project B more appealing

7.
This would make Project B less appealing