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.
Expert Answer:
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