The Butler-Perkins Company (BPC) must decide between two mutually exclusive proj

Question

The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $7,000 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 Flows Probability Cash Flows
0.2 $6,250 0.2 $0
0.6 $7,000 0.6 $7,000
0.2 $7,750 0.2 $18,000
BPC has decided to evaluate the riskier project at 13% and the less-risky project at 10%.
a. What is each project's expected annual cash flow? Round your answers to two decimal places.
Project A. $
Project B. $

Project B's standard deviation (?B) is $5,776 and its coefficient of variation (CVB) is 0.74. What are the values of (?A) and (CVA)? Round your answer to two decimal places.
?A = $
CVA =

Explanation / Answer

project A's expected annual cash flow =0.2*$6,250 +0.6 *$7,000+0.2 *$7,750=$7000 project B's expected annual cash flow =0.2*$0 +0.6 *$7,000+0.2 *$18,000 =$7800 Standard deviation of A = sqrt(0.2*($6,250-$7000)^2 +0.6 *($7,000-$7000)^2+0.2 *($7,750-$7000)^2)=$474.341 CVA =$474.341/$7000=0.067763

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