A company has identified two possible investment projects, Project A and Project B, with the following expected
Question:
A company has identified two possible investment projects, Project A and Project B, with the following expected cash flows:
Year | Project A | Project B |
---|---|---|
1 | $10,000 | $5,000 |
2 | $15,000 | $10,000 |
3 | $20,000 | $15,000 |
4 | $25,000 | $20,000 |
5 | $30,000 | $25,000 |
However, the company is uncertain about the future economic conditions, and it estimates that there is a 60% chance of good economic conditions and a 40% chance of bad economic conditions. In good economic conditions, the expected cash flows for Project A and Project B increase by 20%, while in bad economic conditions, the expected cash flows for Project A and Project B decrease by 15%.
a) Calculate the expected cash flows for Project A and Project B under both economic conditions.
b) Calculate the standard deviation of cash flows for Project A and Project B under both economic conditions.
c) Which project would you recommend based on expected values and standard deviations under both economic conditions? Use the coefficient of variation to support your answer.