Question

The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $6,000 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:

PROJECT A		PROJECT B
Probability	Net Cash Flows	Probability	Net Cash Flows
0.2	$5,000	0.2	$        0
0.6	6,750	0.6	6,750
0.2	8,000	0.2	21,000

BPC has decided to evaluate the riskier project at a 13% rate and the less risky project at a 9% rate.

1. What is the expected value of the annual net cash flows from each project? Do not round intermediate calculations. Round your answers to nearest dollar.

   	Project A	Project B
   Net cash flow	$	$

   
   What is the coefficient of variation (CV)? Do not round intermediate calculations. (Hint: σ_B=$6,890 and CV_B=$0.84.)

   	σ (to the nearest whole number)	CV (to 2 decimal places)
   Project A	$
   Project B	$

2. 
   
3. What is the risk-adjusted NPV of each project? Do not round intermediate calculations. Round your answer to the nearest dollar.

   Project A		$
   Project B		$

Answer 1

1.
Net cash flow of A=0.2*5000+0.6*6750+0.2*8000=6650

2.
Net cash flow of B=0.2*0+0.6*6750+0.2*21000=8250

3.
Standard deviation of A=sqrt(0.2*(5000-6650)^2+0.6*(6750-6650)^2+0.2*(8000-6650)^2)
=956.5563235

4.
CV of A=956.5563235/6650=0.143843056

5.
Standard deviation of B=sqrt(0.2*(0-8250)^2+0.6*(6750-8250)^2+0.2*(21000-8250)^2)=6890.210447

6.
CV of B=6890.210447/8250=0.835177024

7.
NPV of A=-6000+6650/9%*(1-1/1.09^3)=10833.10953

8.
NPV of B=-6000+8250/13%*(1-1/1.13^3)=13479.50893