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 Project X is an investment of $ 75,000 to replace a working but outdated cooling equipment.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 $ 150,000 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 2ProbabilityCash FlowProbabilityCash Flow0.16$00.08$00.66$500000.82$500000.18$1000000.10$100000 Project Y Year 1 Year 2ProbabilityCash FlowProbabilityCash Flow0.50$00.13$00.50$2000000.74$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: IRR for each project, and rank the projects according to the IRR criteria.

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Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

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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 Project X is an investment of $ 75,000 to replace a working but outdated cooling equipment.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 $ 150,000 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: IRR for each project, and rank the projects according to the IRR criteria.

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