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8. Problem 12.12 (Project Risk Analysis)

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The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial after-tax cash outflow of $6,500 and has an expected life of 3 years. Annual project after-tax cash flows begin 1 year after the initial investment and are subject to the following probability distributions:

Project A			Project B
Probability	Cash Flows		Probability	Cash Flows
0.2	$6,000		0.2	$ 0
0.6	6,500		0.6	6,500
0.2	7,000		0.2	18,000

BPC has decided to evaluate the riskier project at 12% and the less-risky project at 8%.

1. What is each project's expected annual after-tax cash flow? Round your answers to the nearest cent.

   Project A:	$
   Project B:	$

   Project B's standard deviation (_B) is $5,822 and its coefficient of variation (CV_B) is 0.78. What are the values of _A and CV_A? Do not round intermediate calculations. Round your answer for standard deviation to the nearest cent and for coefficient of variation to two decimal places.

   A:	$
   CVA:

3. Based on the risk-adjusted NPVs, which project should BPC choose? -Select-Project AProject BItem 5
5. If you knew that Project B's cash flows were negatively correlated with the firm's other cash flows, but Project A's cash flows were positively correlated, how might this affect the decision? -Select-This would make Project B more appealing.This would make Project B less appealing.Item 6 If Project B's cash flows were negatively correlated with gross domestic product (GDP), while A's cash flows were positively correlated, would that influence your risk assessment? -Select-This would make Project B more appealing.This would make Project B less appealing.Item 7