Manager Cafe "Blue Sky" is considering investing 2 (two) projects. Project X is an investment of $ 75,000 to replace a working but outdated cooling equipment. Project Y is a $ 1,500,000 investment to expand the dining facilities. Relevant cash flow data for the two projects over the expected 2 years are as follows: Project X Year 1 Year 2 Probability Cash Flow Probability Cash Flow 0.16 $0 0.08 $0 0.66 $50000 0.82 $50000 0.18 $100000 0.10 $100000 Project Y Year 1 Year 2 Probability Cash Flow Probability Cash Flow 0.50 $0 0.13 $0 0.50 $200000 0.74 $100000 0.13 $200000 Calculate: Expected value, standard deviation, and coefficient of variation for cash flows from each project. Compute: Risk-adjusted NPV for each project using a cost of capital of 15% for riskier projects, and 12% cost of capital for less risky projects. Which project is more profitable using the NPV criteria? Calculate: PI for each project, and rank the projects according to the PI criteria. Calculate: IRR for each project, and rank the projects according to the IRR criteria. Compare your answers to b, c, and d, and discuss any differences

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 21P

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Manager Cafe "Blue Sky" is considering investing 2 (two) projects. Project X is an investment of $ 75,000 to replace a working but outdated cooling equipment. Project Y is a $ 1,500,000 investment to expand the dining facilities. Relevant cash flow data for the two projects over the expected 2 years are as follows:

Project X
Year 1	Year 2
Probability	Cash Flow	Probability	Cash Flow
0.16	$0	0.08	$0
0.66	$50000	0.82	$50000
0.18	$100000	0.10	$100000

Project Y
Year 1	Year 2
Probability	Cash Flow	Probability	Cash Flow
0.50	$0	0.13	$0
0.50	$200000	0.74	$100000
		0.13	$200000

Calculate: Expected value, standard deviation, and coefficient of variation for cash flows from each project.
Compute: Risk-adjusted NPV for each project using a cost of capital of 15% for riskier projects, and 12% cost of capital for less risky projects. Which project is more profitable using the NPV criteria?
Calculate: PI for each project, and rank the projects according to the PI criteria.
Calculate: IRR for each project, and rank the projects according to the IRR criteria.
Compare your answers to b, c, and d, and discuss any differences

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