Problem 11-15 Risky Cash Flows The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each...

60.1K

Verified Solution

Question

Finance

Problem 11-15
Risky Cash Flows

The Bartram-Pulley Company (BPC) must decide between twomutually exclusive investment projects. Each project costs $7,500and has an expected life of 3 years. Annual net cash flows fromeach project begin 1 year after the initial investment is made andhave the following probability distributions:

PROJECT APROJECT B
ProbabilityNet Cash
Flows
ProbabilityNet Cash
Flows
0.2$6,0000.2$        0  
0.66,7500.66,750
0.28,0000.216,000

BPC has decided to evaluate the riskier project at a 12% rateand the less risky project at a 8% rate.

  1. What is the expected value of the annual net cash flows fromeach project? Do not round intermediate calculations. Round youranswers to nearest dollar.
    Project AProject B
    Net cash flow$$

    What is the coefficient of variation (CV)? Do not roundintermediate calculations. (Hint:?B=$5,097 andCVB=$0.70.)
    ? (to the nearest whole number)CV (to 2 decimal places)
    Project A$
    Project B$

  2. What is the risk-adjusted NPV of each project? Do not roundintermediate calculations. Round your answer to the nearest dollar.
    Project A$
    Project B$

  3. If it were known that Project B is negatively correlated withother cash flows of the firm whereas Project A is positivelycorrelated, how would this affect the decision?
    This would tend to reinforce the decisionto  -Select-acceptrejectItem 9 Project B.

    If Project B's cash flows were negatively correlated with grossdomestic product (GDP), would that influence your assessment of itsrisk?
    -Select-YesNoItem 10

Answer & Explanation Solved by verified expert
3.8 Ratings (473 Votes)
    See Answer
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Transcribed Image Text

Problem 11-15Risky Cash FlowsThe Bartram-Pulley Company (BPC) must decide between twomutually exclusive investment projects. Each project costs $7,500and has an expected life of 3 years. Annual net cash flows fromeach project begin 1 year after the initial investment is made andhave the following probability distributions:PROJECT APROJECT BProbabilityNet CashFlowsProbabilityNet CashFlows0.2$6,0000.2$        0  0.66,7500.66,7500.28,0000.216,000BPC has decided to evaluate the riskier project at a 12% rateand the less risky project at a 8% rate.What is the expected value of the annual net cash flows fromeach project? Do not round intermediate calculations. Round youranswers to nearest dollar.Project AProject BNet cash flow$$What is the coefficient of variation (CV)? Do not roundintermediate calculations. (Hint:?B=$5,097 andCVB=$0.70.)? (to the nearest whole number)CV (to 2 decimal places)Project A$Project B$What is the risk-adjusted NPV of each project? Do not roundintermediate calculations. Round your answer to the nearest dollar.Project A$Project B$If it were known that Project B is negatively correlated withother cash flows of the firm whereas Project A is positivelycorrelated, how would this affect the decision?This would tend to reinforce the decisionto  -Select-acceptrejectItem 9 Project B.If Project B's cash flows were negatively correlated with grossdomestic product (GDP), would that influence your assessment of itsrisk?-Select-YesNoItem 10

Other questions asked by students