The probability distribution of a less risky expected return is more peaked than that of a riskier return. What shape would the probability distribution be for (a) completely certain returns and (b) completely uncertain returns?
Step 11 of 2
In this exercise, we will determine the shape of the probability distribution for completely certain returns.
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A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows:
a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project. b. Assuming the projects are independent, which one(s) would you recommend? c. If the projects are mutually exclusive, which would you recommend? d. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?