Following up Problem 16.22, even though we take riskiness into account, there still is difficulty with NPV as a decision criterion. Sup-pose that you are facing the two risky projects shown in Figure 16.15.Project A pays either $10,000 for each of 2 years or $100 for those 2 years. Project B pays $10,000 either in the first year or the second year and $100 in the other year. Assume that the cash flows are annual profits.
a. Which of these two risky investments would you prefer? Why?
b. Calculate the expected NPV for both projects, using the same 9%interest rate from Problem 16.22. Based on expected NPV, in which project would you invest?
c. After careful assessment, you have concluded that you are risk-averse and that your utility function can be adequately represented by U (Xi) = ln (Xi), where Xi represents cash flow during year i. Calculate the expected net present utility for each project. Net present utility is given by

d. NPU in part c should incorporate your attitude toward risk. Are your NPU calculations in part c consistent with your preferences in part a? What is there about these two projects that is not captured by your utility function? Can you think of any other way to model your preferences?

U(X NPU-.UX