Question

# The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial...

The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial outflow of \$7,000 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 \$6,750 0.2 \$          0 0.6 7,000 0.6 7,000 0.2 7,250 0.2 17,000

BPC has decided to evaluate the riskier project at 11% 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 (σB) is \$5,426 and its coefficient of variation (CVB) is 0.71. What are the values of (σA) 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.
 σA: \$ CVA:

2. Based on their risk-adjusted NPVs, which project should BPC choose?
-Select-Project AProject BItem 5

3. 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.Item 6

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.

a. Project expected annual cash flows of Project A=0.2*6750+0.6*7000+0.2*7250 =7000
Project expected annual cash flows of Project B=0.2*0+0.6*7000+0.2*17000 =7600

b. Standard Deviation of A =(0.2*(6750-7000)^2+0.6*(7000-7000)^2+0.2*(7250-7000)^2)^0.5=158.1139
CVa =Standard Deviation of A/Project expected annual cash flows of Project A =158.1139/7000=0.02

c. NPV of risk adjusted A =PV of Cash flows-Initial Investment =7000*((1-(1+11%)^-3)/11%)-7000 =10106.00
NPV of risk adjusted B =PV of Cash flows-Initial Investment =7600*((1-(1+11%)^-3)/11%)-7000 =11572.23
Project B should be chosen

d. This would make Project B more appealing.

e. This would make Project B more appealing

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