Risk-adjusted NPV of Projects
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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
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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?
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Solution Summary
Risk-adjusted NPV of two mutually exclusive Projects are calculated
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