1 Project risk analysis 2 3 Costs, Projects A and B 4 Expected life of projects (in years) A 5 Difference between Project A CFs 6 7 Project A: 8 9 10 11 12 13 14 Project B: Probability 0.2 0.6 0.2 Probability 0.2 0.6 0.2 15 16 17 18 19 20 21 22 Calculation of Expected CF, SD and CV: 23 Project A: 24 Expected annual cash flow 25 26 Discount rate, risky project Discount rate, less risky project Standard deviation (SDA) Coefficient of variation (CVA) B $7,000.00 3 $750.00 Cash Flows $6,250.00 $7,000.00 $7,750.00 Cash Flows $0.00 $7,000.00 $18,000.00 11.00% 10.00% D Formulas #N/A #N/A #N/A A 28 Project B: 29 Expected annual cash flow 30 Standard deviation (SDB) 31 Coefficient of variation (CVB) 32 33 Which project is riskier? 34 Project A risk-adjusted discount rate 35 Project B risk-adjusted discount rate 36 37 Calculation of Risk-Adjusted NPVs: 38 NPVA 39 NPVB 40 Which project should be chosen? B $9,705.67 #DIV/0! D #N/A #N/A #N/A #N/A #N/A #N/A #N/A