60.1K

Verified Solution

Link Copied!

The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $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 11% and the less-risky project at 10%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

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

Project A: $ fill in the blank 2

Project B: $ fill in the blank 3

Project B's standard deviation (_B) is $5,425.86 and its coefficient of variation (CV_B) is 0.71. What are the values of (_A) and (CV_A)? Round your answers to two decimal places.

_A = $ fill in the blank 4

CV_A = fill in the blank 5

Based on the risk-adjusted NPVs, which project should BPC choose?

Project AProject B

If you knew that Project B's cash flows were negatively correlated with the firm's other cash flow, but Project A's cash flows were positively correlated, how might this affect the decision?

This would make Project B more appealing.This would make Project 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?

This would make Project B more appealing.This would make Project B less appealing.

Answer & Explanation Solved by verified expert

See Answer