Project A will have an initial outlay of $7,200. Project B will cost $6,800. Bot

Question

Project A will have an initial outlay of $7,200. Project B will cost $6,800. Both projects will last for three years.

Project A
Probability, Net Cash Flows ($)
0.2, 8,100
0.5, 9,100
0.3, 10,500

Project B
Probability, Net Cash Flows ($)
0.2, 500
0.5, 8,100
0.3, 16,500

To evaluate the two projects, you decide to use the company's weighted average cost of capital (WACC) for the less risky project (12 percent) and the WACC plus two points (14 percent) for the more risky project.


What is the expected value for each project, the coefficient of variation for both projects, and risk-adjusted NPV for each project?

Explanation / Answer

NPV 12783 Project A 14327 PROJECT B PROJECT B SELECTED BECAUSE OF HIGH NPV

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