Question: Juan Carlos is considering two investment projects whose present values are described as follows. Project 1: PW(10%) = 20X + 8XK, where X and

Juan Carlos is considering two investment projects whose present values are described as follows.
€¢ Project 1: PW(10%) = 20X + 8XK, where X and Y are statistically independent discrete random variables with the following distributions:

€¢ Project 2:
PW(I0%) Probability
$0.............................0.24
400........................... 0.20
1.600......................... 0.36
2,400......................... 0.20
(Cash flows between the two projects are also assumed to be statistically independent.)
(a) Develop the NPW distribution for project 1.
(b) Compute the mean and variance of the NPW for project 1.
(c) Compute the mean and variance of the NPW for project 2.
(d) Suppose that projects 1 and 2 are mutually exclusive. Which project would you select?

X (Price) Y (Volume) Event Probablity Event Probability $20 0.6 10 0.4 40 0.4 20 0.6

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