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

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 the less-risky project at 9%.

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?

a. Project expected annual cash flows of Project A=0.2*6250+0.6*7000+0.2*7750 =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*(6250-7000)^2+0.6*(7000-7000)^2+0.2*(7750-7000)^2)^0.5=474.3416 or 474.34
CVa =Standard Deviation of A/Project expected annual cash flows of Project A =474.34/7000=0.07

c. NPV of risk adjusted A =PV of Cash flows-Initial Investment =7000*((1-(1+12%)^-3)/12%)-7000 =9812.82
NPV of risk adjusted B =PV of Cash flows-Initial Investment =7600*((1-(1+12%)^-3)/12%)-7000 =11253.97

Project B should be chosen