Question: You have identified two mutually exclusive investment projects. The initial cost and the present value of the two projects are identical. Both projects have an

You have identified two mutually exclusive investment projects. The initial cost and the present value of the two projects are identical. Both projects have an economic life of two years.

	Initial Investment	PV of the Project	Annual Volatility of the Project
Project 1	$100 million	$125 million	25%
Project 2	$100 million	$125 million	35%

(a) Calculate the NPV of the two projects. According to the NPV analysis, which one will you prefer? Why?

You have identified two mutually exclusive investment projects. The initial cost and

(b) Find u and d.

The value of the investment projects is not certain. Its value can go up by a factor of u or down by d in one year, where u=cov and d=eon o is the annual volatility of the project, and t is the length of the step in the binomial model. For both projects, t =1

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