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PROJECT RISK ANALYSIS The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $6,750 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: BPC has decided to evaluate the riskier project at 12% and the less-risky project at 10%. a. What is each project's exported annual cash flow? Project B's standard deviation ( σ B ) is $5,798, and its coefficient of variation (CV B ) is 0.76. What are the values of σ A and CV A ? b. Based on the risk-adjusted NPVs, which project should BPC choose? c. If you knew that Project B's cash flows were negatively correlated with the firm's other cash flows, but Project A's cash flows were positively correlated, how might this affect the decision? If Project B's cash flows were negatively correlated with gross domestic product (GDP), while A's cash flows were positively correlated, would that influence your risk assessment?

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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977
BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

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Chapter
Section
Chapter 12, Problem 12P
Textbook Problem

PROJECT RISK ANALYSIS The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each costs $6,750 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:

Chapter 12, Problem 12P, PROJECT RISK ANALYSIS The Butler-Perkins Company (BPC) must decide between two mutually exclusive

BPC has decided to evaluate the riskier project at 12% and the less-risky project at 10%.

  1. a. What is each project's exported annual cash flow? Project B's standard deviation (σB) is $5,798, and its coefficient of variation (CVB) is 0.76. What are the values of σA and CVA?
  2. b. Based on the risk-adjusted NPVs, which project should BPC choose?
  3. c. If you knew that Project B's cash flows were negatively correlated with the firm's other cash flows, but Project A's cash flows were positively correlated, how might this affect the decision? If Project B's cash flows were negatively correlated with gross domestic product (GDP), while A's cash flows were positively correlated, would that influence your risk assessment?

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