1. Calculate the expected net cash flows for each one of the two years.. 2. Calculate and comment the standard deviations and the coefficient of variations of the NCFS of each year. What do they mean and what do they imply? 3. Should ALPHA proceed with the new bottle project based on the NPV evaluation approach?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
![A bottle company ALPHA, is considering creating a new bottle of 0.25 lt. To decide
whether to invest in this project or not, they performed market research that costed
€5,000. The results indicated two possible scenarios that depend on the competitor's
reaction to create a similar product and on the percentage of the faithful customers of
ALPHA. Scenario A has a 45% chance to be realized, while scenario B has a probability
of 55%. For the project's realization the company must purchase special machinery that
cost €80,000, while transportation and installation costs amount to €2,000. The useful
life of the project is two years, and the machinery can be sold at the end of the useful
life for €30,000. Table 1 presents the pertinent economic data. At the end of the second
year the working capital is going to be recaptured. The tax rate is 25%, the weighted
average cost of capital is 10% and the company fully depreciates fixed assets for tax
purposes, using the straight-line depreciation method.
Table 1: Pertinent economic data
Year 1
Sales in pieces
Variable cost per unit of
products
Sale price per unit of products
Administrative & marketing
expenses
Working Capital
Scenario Scenario
A
B
150,000 200,000
0.8
1.5
20,000
15,000
1
1.7
25,000
15,000
Year 2
Scenario
A
200,000
1
1.8
25,000
17,000
Scenario
B
250,000
1.2
2
30,000
17,000
1. Calculate the expected net cash flows for each one of the two years.
2. Calculate and comment the standard deviations and the coefficient of variations of
the NCFs of each year. What do they mean and what do they imply?
3. Should ALPHA proceed with the new bottle project based on the NPV evaluation
approach?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff5c94d30-38fe-49cd-9f70-67adc0b8c090%2Fdf8bea3b-63a7-46dd-8523-61ce7051173d%2Fntots2w_processed.jpeg&w=3840&q=75)
![](/static/compass_v2/shared-icons/check-mark.png)
Step by step
Solved in 2 steps with 2 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Would the above decision change if they applied the
![Essentials Of Investments](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
![FUNDAMENTALS OF CORPORATE FINANCE](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Essentials Of Investments](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
![FUNDAMENTALS OF CORPORATE FINANCE](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Foundations Of Finance](https://www.bartleby.com/isbn_cover_images/9780134897264/9780134897264_smallCoverImage.gif)
![Fundamentals of Financial Management (MindTap Cou…](https://www.bartleby.com/isbn_cover_images/9781337395250/9781337395250_smallCoverImage.gif)
![Corporate Finance (The Mcgraw-hill/Irwin Series i…](https://www.bartleby.com/isbn_cover_images/9780077861759/9780077861759_smallCoverImage.gif)