The Hokie Corporation is considering two mutually exclusive projects. Both require an initial outlay of $10,000 and will operate for five years. The probability distributions associated with each project for years 1 through 5 are given as follows:
Probability Distribution for Cash Flow Years 1-5 (the same cash flow each year)
Project A Project B
Probability Cash Flow Probability Cash Flow
0.15 $4,000 0.15 $2,000
0.7 5,000 0.7 6,000
0.15 6,000 0.15 10,000
Because Project B is the riskier of the two projects, the management of Hokie Corporation has decided to apply a required rate of return of 15 percent to its evaluation but only a 12 percent required rate of return to project A.
a. Determine the expected value of each project’s annual cash flows.
b. Determine each project’s risk-adjusted net present value.
c. What other factors might be considered in deciding between these two projects?