The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial outflow of $6,500 and has an expecte life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions: Project A Project B Probability Cash Probability Cash Flows Flows 0.2 $6,000 0.2 2$ 0.6 6,500 0.6 6,500 0.2 7,000 0.2 17,000 BPC has decided to evaluate the riskier project at 12% and the less-risky project at 9%. a. What is each project's expected annual cash flow? Round your answers to the nearest cent. Project A: 2$ Project В: $ Project B's standard deviation (OB) is $5,464 and its coefficient of variation (CVB) is 0.75. What are the values of (GA) and (CVA)? Do not round inte diate calculations. Round your answer for standard deviation to the nearest two decimal places. ent and for coefficient of variation OA: $ CVA: b. Based on their risk-adjusted NPVs, which project should BPC choose? -Select- + c. If you knew that Project B's cash flows were negatively correlated with the firm's other cash flow, whereas Project A's flows were positively correlated, might this affect the decision? -Select- If Project B's cash flows were negatively correlated with gross domestic product (GDP), while A's flows were positively correlated, would that influence your risk assessment? -Select-
The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial outflow of $6,500 and has an expecte life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions: Project A Project B Probability Cash Probability Cash Flows Flows 0.2 $6,000 0.2 2$ 0.6 6,500 0.6 6,500 0.2 7,000 0.2 17,000 BPC has decided to evaluate the riskier project at 12% and the less-risky project at 9%. a. What is each project's expected annual cash flow? Round your answers to the nearest cent. Project A: 2$ Project В: $ Project B's standard deviation (OB) is $5,464 and its coefficient of variation (CVB) is 0.75. What are the values of (GA) and (CVA)? Do not round inte diate calculations. Round your answer for standard deviation to the nearest two decimal places. ent and for coefficient of variation OA: $ CVA: b. Based on their risk-adjusted NPVs, which project should BPC choose? -Select- + c. If you knew that Project B's cash flows were negatively correlated with the firm's other cash flow, whereas Project A's flows were positively correlated, might this affect the decision? -Select- If Project B's cash flows were negatively correlated with gross domestic product (GDP), while A's flows were positively correlated, would that influence your risk assessment? -Select-
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial outflow of $6,500 and has an expected
life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions:
Project A
Project B
Probability Cash
Probability
Cash
Flows
Flows
0.2
$6,000
0.2
$
0.6
6,500
0.6
6,500
0.2
7,000
0.2
17,000
BPC has decided to evaluate the riskier project at 12% and the less-risky project at 9%.
a. What is each project's expected annual cash flow? Round your answers to the nearest cent.
Project
A:
2$
Project
B:
$
Project B's standard deviation (OB) is $5,464 and its coefficient of variation (CVB) is 0.75. What are the values
intermediate calculations. Round your answer for standard deviation to the nearest cent and for coefficient of variation to two decimal
(GA) and (CVA)? Do not round
2$
CVA:
b. Based on their risk-adjusted NPVS, which project should BPC choose?
-Select-
c. If you knew that Project B's cash flows were negatively correlated with the firm's other cash flow, whereas Project A's flows were positively correlated, how
might this affect the decision?
-Select-
If Project B's cash flows were negatively correlated with gross domestic product (GDP), while A's flows were positively correlated, would that influence
your risk assessment?
-Select-
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