The Bartram

.docx
School
Lincoln University **We aren't endorsed by this school
Course
BUSINESS 202
Subject
Finance
Date
Nov 2, 2023
Pages
5
Uploaded by SuperHumanScorpion5101 on coursehero.com
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 1year after the initial investment is made and have the following probability distributions: Project A Project B Probability Net Cash Flows Probability Net Cash Flows 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 the less risky project at a 10% rate. 1. What is the risk-adjusted NPV of each project? 2. 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? 3. If Project B's cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk? Please show formulas There are 4 steps to solve this one. Expert-verified 1st step All steps Answer only o Step 1
Question 1. Compute the risk-adjusted NPV: Excel: A B C D 1 Project A 2 Probability Cash Flows Weighted CF Variance CF 3 0.2 $6,000 $1,200 $112,500 4 0.6 $6,750 $4,050 $0 5 0.2 $7,500 $1,500 $112,500 6 Annual cashflows $6,750 7 Standard deviation $474 8 Coefficient of variation 0.07 9 1 0 Project B 11 Probability Cash Flows Weighted CF Variance CF 1 2 0.2 $0 $0 $11,704,500 1 3 0.6 $6,750 $4,050 $486,000 1 4 0.2 $18,000 $3,600 $21,424,500 1 5 Annual cashflows $7,650 1 6 Standard deviation $5,798 1 7 Coefficient of variation 0.76 1 8 1 9 Risk-adjusted NPV 2 Year Project A Project B
0 2 1 Initial cashflows -$6,750 -$6,750 2 2 Annual cashflows $6,750 $7,650 2 3 Cost of capital 10% 12% 2 4 Useful life 3 3 2 5 PV of cashflows $16,786.2 5 $18,374.01 2 6 Risk-adjusted NPV $10,036.2 5 $11,624.01 o Step 2 Question 1. Compute the risk-adjusted NPV: Workings: A B C D 1 Project A 2 Probability Cash Flows Weighted CF Variance CF 3 0.2 6000 =A3*B3 =A3*-B3-B6^2 4 0.6 6750 =A4*B4 =A4*-B4-B6^2 5 0.2 7500 =A5*B5 =A5*-B5-B6^2 6 Annual cashflows =C3+C4+C5 7 Standard deviation =-D3+D4+D5^(1/2) 8 Coefficient of variation =B7/B6 9 1 0 Project B 11 Probability Cash Flows Weighted CF Variance CF 1 2 0.2 0 =A12*B12 =A12*-B12- B15^2
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