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Question
John Q. Enterprises is considering two potential investments. The probability distributions of annual end-of-year cash flows for the respective projects are:| Project A | Project B | ||
| Probability | Outcome | Probability | Outcome |
| 0.25 | $10,000 | 0.25 | $12,000 |
| 0.50 | $15,000 | 0.50 | $15,000 |
| 0.25 | $20,000 | 0.25 | $18,000 |
Both projects will require an initial outlay of $45,000 and will have an estimated life of 6 years. Project A is considered a riskier investment and will have to have a risk-adjusted required rate of return of 15%, while Project B's risk-adjusted required rate of return is 12%.
a. Determine the expected value of each project's annual cash flow.
b. Determine each project's risk-adjusted net present value.
Answer
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