1. A company has to choose between three projects: Project A has a 30% chance of producing a return of £25000, a 45% chance of producing a return of £7000 and a 25% chance of producing a return of £6000. Project B has a 50% chance of a £16000 return, 30% chance of an £14000 return and a 20% chance of a zero return. Project C has a 35% chance of a £35000 return, a 40% chance of a £12000 return and a 25% chance of making a loss of £8000. a) Calculate the expected value and the variance of each project. b) Hence decide which option the company should choose and why?

1. A company has to choose between three projects: Project A has a 30% chance of producing a return of £25000, a 45% chance of producing a return of £7000 and a 25% chance of producing a return of £6000. Project B has a 50% chance of a £16000 return, 30% chance of an £14000 return and a 20% chance of a zero return. Project C has a 35% chance of a £35000 return, a 40% chance of a £12000 return and a 25% chance of making a loss of £8000. a) Calculate the expected value and the variance of each project. b) Hence decide which option the company should choose and why?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 6P

See similar textbooks

Similar questions

Tropical Sweets is considering a project that will cost $70 million and will generate expected cash flows of $30 million per year for 3 years. The cost of capital for this type of project is 10%, and the risk-free rate is 6%. After discussions with the marketing department, you learn that there is a 30% chance of high demand with associated future cash flows of $45 million per year. There is also a 40% chance of average demand with cash flows of $30 million per year as well as a 30% chance of low demand with cash flows of only $15 million per year. What is the expected NPV?
A firm evaluates all of its projects by applying the IRR rule. If the required return is 18 percent, will the firm accept the following project?CF0 = -$30,000CO1 = $20,000C02 = $14,000C03 = $11,000 yes or no
Your company plans to invest in a particular project. There is a 35% chance that you will lose $30,000, a 40% chance that you will break even, and a 25% chance that you will make $55,000. What is the Expected Value of this investment?
Celestial Crane Cosmetics is analyzing a project that requires an initial investment of $3,225,000. The project's expected cash flows are: Year Cash Flow Year 1 $375,000 Year 2 -125,000 Year 3 500,000 Year 4 400,000 If the company's WACC is 8% and the project has the same risk as the firm's average project, what is the project's modified internal rate of return (MIRR)? Should you accept or reject this project?
Aliska plc is investing £990,000 in a project. If it is a success then the return will be £230,000. However, if a particular risk occurs the return will reduce to £10,000. The probability of this risk occurring is 02 What is the project's expected return on the investment for risk evaluation purposes? A. 4.85% B. 5.45% C. 18.79% D. 19.39%
It was determined that the profits from a new product launch would be $250,000 if the market is good, $150,000 if the market is fair, and -$100,000 (a loss) if the market is poor. The probability of the market being good is 0.40, fair is 0.40, and poor is 0.20. The expected monetary value (EMV) of the new product is $300,000 $140,000 $500,000 $180,000
A project is thought to have a 0.55 probability of making a profit of P400,000 and a 0.45 probability of making a profit of P200,000. What is the change in expected profit if the probabilities actually turn out to be 0.60 and 0.40, respectively?
You estimate that a planned project for your company has a 0.3 chance of tripling the investment in a year and a 0.7 chance of halving the investment in a year. What is the standard deviation of the return on this project? A.1.5625 B.1.3126 C.1.2247 D.1.1457
Please help to solve all the below :) What is the average return per year for a project that has an initial investment of $75,000 with an average return of $12,000 per year over 10 years? a) $1,080 b) $10,800 c) $4,500 d) $11,000 e) $3,200 Based on previous answer, what is the Return on investment (ROI) of this project? a) 8.5 b) 6 c) 4 d) 5.5 e) 3 Which of the following best describes a cost-bound project? a) A project that is constrained by a hard deadline in which the delivery timing is as important as the delivery itself b) A project that is constrained by safety standards in which the safety aspect of the project is as important as the delivery itself c) A project that is constrained by a hard budget in which the cost of the project is as important as the delivery itself d) A and C e) All of the above What would be the discount factor at year 3 of a 4-year project, if the discount rate is 6%? a) 0.78 b) 0.84 c) 0.89 d) 0.96 e) None of the above
Heckrwee Industries is considering a project that would require an initial investment of $101,000. The project would result in cost savings of $62,000 in year 1 and $70,000 in year 2. The internal rate of return is a.between 18% and 20%. b.between 16% and 17%. c.under 15%. d.None of these choices are correct.
You have two projects that met the payback period and accounting rate of return screeningsidentically. Project 1 produced an NPV of Php 450,000 and had an IRR between 5% and 8%.Project 2 produced a NPV of Php 350,000 and had an IRR of 10%. This leaves you with a difficultchoice, since each alternative has a measurement that exceeds the other and the other variablesare the same. Which project would you invest in and why?
A company is considering investing in a new project that requires an initial investment of $1,000,000. The projected cash flows from the project are as follows: Year 1: $300,000 Year 2: $400,000 Year 3: $500,000 Year 4: $600,000 The company's required rate of return for similar projects is 12%. What is the Net Present Value (NPV) of the project? What is the Internal Rate of Return (IRR) of the project? YOU MUST SHOW CALCULATIONS TO BACK UP YOUR SELECTION. -$100,000// 12% $250,000 // 10% $250,000 // 14% $350,000 // 14% $50,000 // %14