Expected Return. Pediatric Medicine, Ltd., is considering two alternative capital budgeting projects. Project A is an investment of $300,000 to renovate office facilities. Project B is an investment of $600,000 to expand diagnostic capabilities. Relevant cash flow data for the two projects over their expected two-year lives are as follows:
A. Calculate the expected value, standard deviation, and coefficient of variation of cash flows for each project.
B. Calculate the risk-adjusted NPV for each project, using a 12% cost of capital for the more risky project and 10% for the less risky one. Which project is preferred using the NPV criterion?
C. Calculate the PI for each project, and rank them according to their PIs.
D. Calculate the IRR for each project, and rank them according to their IRRs.
E. Compare your answers to parts B, C, and D, and discuss any differences.

Question

Expected Return. Pediatric Medicine, Ltd., is considering two alternative capital budgeting projects. Project A is an investment of $300,000 to renovate office facilities. Project B is an investment of $600,000 to expand diagnostic capabilities. Relevant cash flow data for the two projects over their expected two-year lives are as follows:
  A. Calculate the expected value, standard deviation, and coefficient of variation of cash flows for each project.
B. Calculate the risk-adjusted NPV for each project, using a 12% cost of capital for the more risky project and 10% for the less risky one. Which project is preferred using the NPV criterion?
C. Calculate the PI for each project, and rank them according to their PIs.
D. Calculate the IRR for each project, and rank them according to their IRRs.
E. Compare your answers to parts B, C, and D, and discuss any differences.

Quizplus · Accepted Answer

The Answer of Expected Return. Pediatric Medicine, Ltd., is considering two alternative capital budgeting projects. Project A is an investment of $300,000 to renovate office facilities. Project B is an investment of $600,000 to expand diagnostic capabilities. Relevant cash flow data for the two projects over their expected two-year lives are as follows:
  A. Calculate the expected value, standard deviation, and coefficient of variation of cash flows for each project.
B. Calculate the risk-adjusted NPV for each project, using a 12% cost of capital for the more risky project and 10% for the less risky one. Which project is preferred using the NPV criterion?
C. Calculate the PI for each project, and rank them according to their PIs.
D. Calculate the IRR for each project, and rank them according to their IRRs.
E. Compare your answers to parts B, C, and D, and discuss any differences.