Question

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** 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 11% and the less-risky project at 9%.

QA. What is each project's expected annual cash flow? Round your answers to two decimal places.

Project A $

Project B $

QB. Project B's standard deviation (σB) is $5,464 and its coefficient of variation (CVB) is 0.75. What are the values of (σA) and (CVA)? Round your answer to two decimal places.

σA = $

CVA =

Based on the risk-adjusted NPVs, which project should BPC choose? Options are: Project A or Project B

If you knew that Project B's cash flows were negatively correlated with the firm's other cash flows, but Project A's cash flows were positively correlated, how might this affect the decision? Options are: B more appealing or B less appealing

If Project B's cash flows were negatively correlated with gross domestic product (GDP), while A's cash flows were positively correlated, would that influence your risk assessment? Options are: B is more appealing or B is less appealing

Answer #1

Q A. Expected Annual Cash Flow =0.2*6000+0.6*6500+0.2*7000
=**6500**

Expected Annual Cash Flow =0.2*0+0.6*6500+0.2*17000 =**7300**

QB. Standard Deviation of A
=(0.2*(6000-6500)^2+0.6*(6500-6500)^2+0.2*(7000-6500)^2)^0.5
=**316.23**

Coefficient of Variation =Standard Deviation of A/Expected Annual
Cash Flow =316.23/6500 =**0.05**

QC. Project B is more appealing (Negative correlation causes the
standard deviation of portfolio are different)

Project B is more appealing (Negative correlation causes the
standard deviation of portfolio are different)

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...

ch 12
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
$6,500
0.2
$ 0
0.6
7,000
0.6
7,000
0.2
7,500
0.2
19,000
BPC has decided to evaluate the riskier project at 13%...

eBook
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
$6,250
0.2
$ 0
0.6
7,000
0.6
7,000
0.2
7,750
0.2
17,000
BPC has decided to evaluate the riskier project at 12% and...

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Project B
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The Bartram-Pulley Company (BPC) must decide between two
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The Bartram-Pulley Company (BPC) must decide between two
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The Bartram-Pulley Company (BPC) must decide between two
mutually exclusive investment projects. Each project costs $7,500
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have the following probability distributions:
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