Hi! I Need THe Answer with working ,,,Not in Excel Sheet .. The Bartram-Pulley C
ID: 2716010 • Letter: H
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Hi! I Need THe Answer with working ,,,Not in Excel Sheet ..
The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $6,750 and has an expected life of 3 years. Annual net cash flows from each project begin 1 year after the initial investment is made and have the following probability distributions: BPC has decided to evaluate the riskier project at a 12% rate and the less risky project at a 10% rate. What is the expected value of the annual net cash flows from each project? What is the coefficient of variation (CV)? What is the risk-adjusted NPV of each project? If it were known that Project B is negatively correlated with other cash flows of the firm whereas Project A is positively correlated, how would this affect the decision? If Project B's cash flows were negatively correlated with gross domestic product (GDP), would that influence your assessment of its risk?Explanation / Answer
Project A A, Probability =p Net Cash Flow = x Expected Cash flow Mean Cash Flow= m X^2*p 0.2 6,000 1,200 6750 7,200,000 0.6 6,750 4,050 6750 27,337,500 0.2 7,500 1,500 6750 11,250,000 6,750 45,787,500 Variance = Sum of X^2*p -m^2 =45787500-6750^2= 225,000.00 Std Deviation = Sq root of variance =Sq root 225000=474.34 Coefficient of variation = Std devaition/Mean =474.34/6750 = 0.070 For Project A Expected Cash Flow 6,750 Coefficient of variation=0.76 0.07 Std deviation= 474 Project B Probability =p Net Cash Flow = x Expected Cash flow Mean Cash Flow= m X^2*p 0.2 - - 7650 - 0.6 6,750 4,050 7650 27,337,500 0.2 18,000 3,600 7650 64,800,000 Total 8,250 7,650 92,137,500 Variance = Sum of X^2*p -m^2 =92137500-7650^2 = 33,615,000 Std Deviation = Sq root of variance =Sq root 33,615,000= 5798 Coefficient of variation = Std devaition/Mean =5798/7650=0.76 For Project B Expected Cash Flow 7,650 Coefficient of variation=0.76 Std deviation = 5,798 Due to lower std deviation and coeff of variation project A is less risky B Project A Probability =p Net Cash Flow = x Expected Cash flow Discount factor @10% PV of cash flow Initial cost (6,750.00) 1.000 (6,750.00) 0.2 6,000 1,200.00 0.909 1,090.91 0.6 6,750 4,050.00 0.826 3,347.11 0.2 7,500 1,500.00 0.751 1,126.97 6,750.00 (1,185.01) Risk adjuted NPV project A = (1,185) Project B Probability =p Net Cash Flow = x Expected Cash flow Discount @12% Initial cost (6,750.00) 1 (6,750) 0.2 - - 0.892857 - 0.6 6,750 4,050 0.797194 3,229 0.2 18,000 3,600 0.71178 2,562 Total 8,250 7,650 (959) Risk adjuted NPV project B = (959) C If a project is negatively corelated with the cash flow of other projects the project should not be accepted even if it has a better NPV on the contrary if a project has lower NPV but positive correlation with cash flow of other projects, it should be accepted. However if a project is negatively corealted to GDP, it can be accepted as many products in reducing GDP flourish and it is not harmful for company as a whole.
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