# Risk-adjusted NPV of Projects

The Bartram-Pulley Company (BPC) must decide between two mutually exclusive

investment Projects. Each project costs $6,750 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 distribution:

Project A Project B

____________________________________________________________________

Probability Net Cash Flow Probabilty Net Cash Flow

____________________________________________________________________

0.2 $6,000 0.2 $0

0.6 6,750 0.6 $6,750

0.2 7.500 0.2 18,000

BPC has decided to evaluate the riskier project at a 12% rate and theless risky project at a 10% rate.

a. What is the expected value for the annual net cash flows from each project? What is the coefficient of variation?

b. What is the risk-adjusted NPV of each project?

c. If it were known that Project B was negatively correlated with other cash flows of the firm whereas Project A was positively correlated, how would this knowledge affect the decision? If Project B's cash flows were negatively correlated with gross domestic product would that influence your assessment of its risk?

Â© BrainMass Inc. brainmass.com March 4, 2021, 7:56 pm ad1c9bdddfhttps://brainmass.com/math/probability/132750

#### Solution Summary

Risk-adjusted NPV of two mutually exclusive Projects are calculated