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1. a) Anderson Associates is considering two mutually exclusive projects that have the following cash flows:...

1. a) Anderson Associates is considering two mutually exclusive projects that have the following cash flows:

Year Project A Cash Flow Project B Cash Flow
0 -$11,000 -$9,000
1 3,500

6,000
2 3,000 4,000
3 5,000 3,000
4 9,000 2,000

At what cost of capital do the two projects have the same net present value?

b)

Ripken Iron Works believes the following probability distribution exists for its stock. What is the standard deviation of return on the company's stock?

State of the Economy

Probability of State Occurring

Stock's Expected Return

Boom

0.25

35%

Normal

0.45

13%

Recession

0.30

-22%
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