The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial after-tax cash outflow of $7,000 and has an expected life of 3 years. Annual project after-tax cash flows begin 1 year after the initial investment and are subject to the following probability distributions: Project A Probability 0.2 0.6 0.2 Project B Cash Flows Probability Cash Flows $6,750 7,000 0.2 $ 0 7,250 0.6 0.2 7,000 17,000 BPC has decided to evaluate the riskier project at 13% and the less-risky project at 9%. a. What is each project's expected annual after-tax cash flow? Round your answers to the nearest cent. Project A: Project B: Project B's standard deviation (OB) is $5,426 and its coefficient of variation (CVB) is 0.71. What are the values of σA and CVA? Do not round intermediate calculations. Round your answer for standard deviation to the nearest cent and for coefficient of variation to two decimal places. σA: CVA: b. Based on the 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 flows, but Project A's cash 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 cash 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 after-tax cash outflow of $7,000 and has an expected life of 3 years. Annual project after-tax cash flows begin 1 year after the initial investment and are subject to the following probability distributions: Project A Probability 0.2 0.6 0.2 Project B Cash Flows Probability Cash Flows $6,750 7,000 0.2 $ 0 7,250 0.6 0.2 7,000 17,000 BPC has decided to evaluate the riskier project at 13% and the less-risky project at 9%. a. What is each project's expected annual after-tax cash flow? Round your answers to the nearest cent. Project A: Project B: Project B's standard deviation (OB) is $5,426 and its coefficient of variation (CVB) is 0.71. What are the values of σA and CVA? Do not round intermediate calculations. Round your answer for standard deviation to the nearest cent and for coefficient of variation to two decimal places. σA: CVA: b. Based on the 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 flows, but Project A's cash 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 cash 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
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Transcribed Image Text:The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial after-tax cash outflow of $7,000 and has an expected life of 3
years. Annual project after-tax cash flows begin 1 year after the initial investment and are subject to the following probability distributions:
Project A
Probability
0.2
0.6
0.2
Project B
Cash Flows
Probability
Cash Flows
$6,750
7,000
0.2
$
0
7,250
0.6
0.2
7,000
17,000
BPC has decided to evaluate the riskier project at 13% and the less-risky project at 9%.
a. What is each project's expected annual after-tax cash flow? Round your answers to the nearest cent.
Project A:
Project B:
Project B's standard deviation (OB) is $5,426 and its coefficient of variation (CVB) is 0.71. What are the values of σA and CVA? Do not round intermediate calculations.
Round your answer for standard deviation to the nearest cent and for coefficient of variation to two decimal places.
σA:
CVA:
b. Based on the 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 flows, but Project A's cash 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 cash flows were positively correlated, would that influence your risk
assessment?
-Select-
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