## Related questions with answers

The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $\$6,750$ 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:

$\begin{matrix} \text{Project A} & \text{ } & \text{Project B}\\ \text{Probability} & \text{Cash Flows} & \text{Probability} & \text{Cash Flows}\\ \text{0.2} & \text{\$ 6000} & \text{0.2} & \text{\$ 0}\\ \text{0.6} & \text{6750} & \text{0.6} & \text{6750}\\ \text{0.2} & \text{7500} & \text{0.2} & \text{18000}\\ \end{matrix}$

BPC has decided to evaluate the riskier project at $12\%$ and the less-risky project at $10\%$.

a. What is each project’s expected annual cash flow? Project B’s standard deviation $\left(\sigma_{\mathrm{B}}\right)$ is $\$5,798$, and its coefficient of variation $\left(\mathrm{CV}_{\mathrm{B}}\right)$ is 0.76. What are the values of $\sigma_{\mathrm{A}}$ and $\mathrm{CV}_{\mathrm{A}} ?$

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

Solution

VerifiedIn this exercise, we are asked to determine the expected annual cash flow of each given project. In addition, we are also asked to determine the standard deviation and coefficient of variation of Project B.

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