The San Diego LLC is considering a three-year project, Project A, involving an i

Question

The San Diego LLC is considering a three-year project, Project A, involving an initial investment of $80 million and the following cash inflows and probabilities:

Describe your answer for each question in complete sentences, whenever it is necessary. Show all of your calculations and processes for the following points:

The San Diego LLC is considering a three-year project, Project A, involving an initial investment of $80 million and the following cash inflows and probabilities: Describe your answer for each question in complete sentences, whenever it is necessary. Show all of your calculations and processes for the following points: Describe and calculate Project A's expected net present value (ENPV) and standard deviation (SD), assuming the discount rate (or risk-free interest rate) to be 8%. What is the decision rule in terms of ENPV? What will be San Diego LLC's decision regarding this project? Describe your answer. The company is also considering another three-year project, Project B, which has an ENPV of $32 million and standard deviation of $10.5 million. Project A and B are mutually exclusive. Which of the two projects would you prefer if you do not consider the risk factor? Explain. Describe the coefficient of variation (CV) and the standard deviation (SD) in connection with risk attitudes and decision making. If you now also consider your risk-aversion attitude, as the CEO of the San Diego LLC will you make a different decision between Project A and Project B? Why or why not?

Explanation / Answer

for year 1 cash flow = 0.2*50+0.3*40+0.4*30+0.1*20

=$36 million

for year 2, = 0.1*60+0.2*50+0.3*40+0.4*30 = $40 million

for year 3 = 0.3*70 +0.4*60+0.1*50+0.2*40 = $54 million

Ans for 1)ENPV = -80 + 36/(1.08) +40/(1.08)^2 +54/(1.08)^3

=$30.5 million

As it is greater than 0 , you have to accept this project

Ans for 2)

You have to choose project B, As it has more ENPV, In case of mutually exclusive proj you have to choose projects with more ENPV

Ans for 3)

CV represents standardization with respect to mean.so if iam CEO i choose CV as measure as it standardizes with respect to mean

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