Problem 11-15 Riisky Cash Flows The Bartrm Pulley Company (BPC) must decide betw
ID: 2715317 • Letter: P
Question
Problem 11-15
Riisky Cash Flows
The Bartrm Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $6,750 and has an expected life of 3 years. Annual net cash flows from each project begins 1 year after the initial investment is made and have the following probability distributions:
Project A Project B
Probability Net Cash Flows Probablity Net Cash Flows
0.2 $6,000 0.2 $ 0
0.6 6,750 0.6 6,750
0.2 7,500 0.2 18,000
BPC has decided to evaluate the riskier project at 12% rate and the less risky project at 10% rate.
a. what is the expected value of the annual net cash flows from each project? What is the coefficient of variation (CV)? Hint: oB= $5,798 and CVb = 0.76
b What is the risk adjusted NPV of each project?
c. If it were known that project b is negatively correlated with other cash flows of the firm whereas project A is positively correlated how would this affect the decisions? If project B cash flows were negatively correlated with gross domestic product (GDP) would that influence your assesment of its risk?
The answers are as follows:
a. Expected CFa = $6,750
Expected CFb = $7,650
CVa = 0.0703
b. NPVa = $10,036
NPVb = $$11, 624
Show all work and formulas to support answers!!!
Explanation / Answer
Problem 11-15 Riisky Cash Flows The Bartrm Pulley Company (BPC) must decide betw