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fm12 9 - 12-8 a Expected annual cash flows Project A...

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12-8 a. Expected annual cash flows: Project A: Probable Probability × Cash Flow = Cash Flow 0.2 $6,000 $1,200 0.6 6,750 4,050 0.2 7,500 1,500 Expected annual cash flow = $6,750 Project B: Probable Probability × Cash Flow = Cash Flow 0.2 $ 0 $ 0 0.6 6,750 4,050 0.2 18,000 3,600 Expected annual cash flow = $7,650 Coefficient of variation: CV = NPV Expected = value Expected deviation Standard NPV σ Project A: σ A = $474.34. = (0.2) ) ($750 + (0.6) ) ($0 + (0.2) ) (-$750 2 2 2 Project B: σ B = (0.2) ) ($10,350 + (0.6) ) (-$900 + (0.2) ) (-$7,650 2 2 2 = $5,797.84. CV A = $474.34/$6,750 = 0.0703. CV B = $5,797.84/$7,650 = 0.7579. b. Project B is the riskier project because it has the greater variability in its probable cash flows, whether measured by the standard deviation or the coefficient of
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