Nicola Company (NC) must decide between two mutually exclusive investment projects. Each project costs $25,000 and has
Question:
Nicola Company (NC) must decide between two mutually exclusive investment projects. Each project costs $25,000 and has an expected life of 3 years. Annual net cash flows from each project begin 1 year after the initial investment is made and have the following probability distributions:
NC has decided to evaluate the riskier project at a 12% rate and the less risky project at a 9% rate.
a. What is the expected value of the annual net cash flows from each project? What is the coefficient of variation (CV)?
b. What is the risk-adjusted NPV of each project?
c. If it were known that Project Y was negatively correlated with other cash flows of the firm, whereas Project X was positively correlated, how would this knowledge affect the decision? If Project Y's cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk?
Step by Step Answer:
Financial Management Theory And Practice
ISBN: 978-0176583057
3rd Canadian Edition
Authors: Eugene Brigham, Michael Ehrhardt, Jerome Gessaroli, Richard Nason