(Risk-adjusted NPV) Denway Motors is evaluating two mutually exchusive projects, both of which require an initial...

 

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(Risk-adjusted NPV) Denway Motors is evaluating two mutually exchusive projects, both of which require an initial outlay of $400000. Each project has an expected life of six years. The cash flows associated with these projects are uncertain but the management team has been able to determine the probability distribution of cash flows. The probability distributions associated with the annual cash flows from cach project are given below: CASH FLOW, YEARS 1-5 PROJECT A PROJECT S PROBABILITY CASH FLOW PROBABILITY CASH FLOW 0.10 $70000 0.10 $40000 0.40 95000 0.20 50000 0.40 80000 0.40 75000 0.10 85000 0.20 80000 0.10 110000 The normal required rate of return for Denway Motors is 9%, but because these projects are riskier than the average project Denway Motors is requiring a higher-than-normal rate of return on them. On project A it is requiring a 12% rate of return and on project Ba 15% rate of returm. (a) Determine the expected value for each project's cash flows. (b) Determine each project's risk-adjusted net present value. (c) What other factors might be considered in deciding between these projects? (Risk-adjusted NPV) Denway Motors is evaluating two mutually exchusive projects, both of which require an initial outlay of $400000. Each project has an expected life of six years. The cash flows associated with these projects are uncertain but the management team has been able to determine the probability distribution of cash flows. The probability distributions associated with the annual cash flows from cach project are given below: CASH FLOW, YEARS 1-5 PROJECT A PROJECT S PROBABILITY CASH FLOW PROBABILITY CASH FLOW 0.10 $70000 0.10 $40000 0.40 95000 0.20 50000 0.40 80000 0.40 75000 0.10 85000 0.20 80000 0.10 110000 The normal required rate of return for Denway Motors is 9%, but because these projects are riskier than the average project Denway Motors is requiring a higher-than-normal rate of return on them. On project A it is requiring a 12% rate of return and on project Ba 15% rate of returm. (a) Determine the expected value for each project's cash flows. (b) Determine each project's risk-adjusted net present value. (c) What other factors might be considered in deciding between these projects?

Answer rating: 100% (QA)

Solution a Expected Cash flow Project A Project B Probability cashflow probability cash flow ... View the full answer