With my Problem 2 I didnt get the answer that I needed Can s

With my Problem 2 I didn\'t get the answer that I needed.

Can someone please help me.

The San Diego LLC is considering a three-year project, Project A, involving an initial investment of $80 million and the following cash inflows and probabilities:

Year 0

Year 1

Year 2

Year 3

Probability

Cash Flow ($ mil)

Probability

Cash Flow ($ mil)

Probability

Cash Flow ($ mil)

0.2

50

0.1

60

0.3

70

0.3

40

0.2

50

0.4

60

0.4

30

0.3

40

0.1

50

0.1

20

0.4

30

0.2

40

Initial Investment $80 mil

Discount Rate 8%

Describe your answer for each question in complete sentences, whenever it is necessary. Show all of your calculations and processes for the following points: Describe and calculate Project A’s expected net present value (ENPV) and standard deviation (SD), assuming the discount rate (or risk-free interest rate) to be 8%. What is the decision rule in terms of ENPV? What will be San Diego LLC’s decision regarding this project? Describe your answer. The company is also considering another three-year project, Project B, which has an ENPV of $32 million and standard deviation of $10.5 million. Project A and B are mutually exclusive. Which of the two projects would you prefer if you do not consider the risk factor? Explain. Describe the coefficient of variation (CV) and the standard deviation (SD) in connection with risk attitudes and decision making. If you now also consider your risk-aversion attitude, as the CEO of the San Diego LLC will you make a different decision between Project A and Project B? Why or why not?

Solution

NPV of project A= 30.54

Standard deviation of project A = 4.12

If we do not consider the risk factor then project B is better as it is giving higher return.

If we have to take risk averse decision, then we will have to consider the project where returns are with less variation. Thus we will choose project A in that case.