1.

The initial investment required to undertake Project A is Tk. 5,000. The following are the probabilities of occurrence of cash flows under different state of the economy. If the cost of capital is 12% and the risk free rate is 7%, should you accept the project? Year 1
Probability
0.3 0.5 0.2

Year 2
Cash Flow
2000 1000 3000

Year 3
Cash Flow
3000 2000 5000

Probability
0.25 0.45 0.3

Probability Cash Flow

0.35 0.45 0.2 3000 4000 6000

2.

The Delta Corporation is considering investing in one of the two mutually exclusive projects: Project A involves an initial outlay of Tk. 1,70,000 and Project B involves an initial outlay of Tk. 1,50,000. The certainty equivalent approach is employed in evaluating risky investments. The current yield on treasury bills is 5% and the company uses this as the risk-less rate. Projected cash inflows with their certainty equivalents are: Year 1 2 3 Cash Inflow 90,000 1,00,000 1,10,000 Project A Certainty Eqvlnt. .8 .7 .5 Project B Cash Inflow Certainty Eqt. 90,000 .9 90,000 .8 1,00,000 .6

Calculate the risk of the following two projects and indicate which project is more risky. Project A Probability Cash Flow .25 1000 .35 1400 .40 1600 Project B Probability Cash Flow .20 1100 .50 1500 .30 1900

State of Economy Recession Normal Boom

There are two projects A and B, both have the same cash outflow of Tk.14,000 and life of 3 years. The discount rate is 13% and the risk free rate is 8%. From the following information calculate the mean value, NPV, standard deviation and co-efficient of variation of the projects.
Year Proj. A 1 Proj. B Year Proj. A 2 Proj. B Year Proj. A 3 Proj. B

Probability 0.35 0.3 0.35

OCF 7000 5000 13000

OCF 6000 6000 12000

Prob. 0.35 0.3 0.35

OCF 5000 4000 11000

OCF 7500 3500 11500

Prob. 0.35 0.3 0.35

OCF 5000 4500 11000

OCF 3000 5000 11000