Question

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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 (σ_B) is $5,426 and its coefficient of variation (CV_B) is 0.71. 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?

Answer 1

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