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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