You are asked to perform a capital budgeting analysis of two projects. Both will require an immediate cash outlay of $1000. Both projects last one year and they both produce revenues at the end of the year amounting to $1500 with certainty. Cash outflows at the end of the year, however, are risky. They are given below, along with the market rate of return, Rm:
Since you are given the cash flows, there is no need to worry about taxes, depreciation, or salvage value.
Note that the cash outflows of Project B have higher variance than those of Project A. Which project has greater NPV? Show your work and explain your reasoning.