Question: The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $8,000 and has an expected life of 3 years. Annual

 The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investmentprojects. Each project costs $8,000 and has an expected life of 3

The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $8,000 and has an expected life of 3 years. Annual net cash flows from each project begin 1 year after the initial investment is made and have the following probability distributions: Project A Project B Probability Cash Flows Probability Cash Flows 0.2 $5,000 0.2 0 0.6 6,750 0.6 6,750 0.2 7,000 0.2 21,000 BPC has decided to evaluate the riskier project at a 11% rate and the less risky project at a 10% rate. a. What is the expected value of the annual cash flows from each project? Do not round intermediate calculations. Round your answers to the nearest dollar. Project A Project B Net cash flow What is the coefficient of variation (CV)? (Hint: OB=$6,890 and CVB=$0.84.) Do not round intermediate calculations. Round o values to the nearest cent and CV values to two decimal places. CV Project A Project B b. What is the risk-adjusted NPV of each project? Do not round intermediate calculations. Round your answers to the nearest cent. Project A Project B C. If it were known that Project B is negatively correlated with other cash flows of the firm whereas Project A is positively correlated, how would this affect the decision? This would tend to reinforce the decision to -Select- Project B. If Project B's cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk? -Select

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!