Problem 2:
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:
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?
