Problem 1: Two projects have the following NPVs and standard deviations:
|
|
Project A
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Project B
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|
NPV
|
200
|
300
|
|
Standard deviation
|
75
|
100
|
Which of the two projects is more risky?
Problem 2: Your firm has an opportunity to make an investment of $50,000. Its cost of capital is 12 percent. It expects aftertax cash flows (include the tax shields from depreciation) for the next 5 years to be as follows:
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Year 1
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$10,000
|
|
Year 2
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20,000
|
|
Year 3
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30,000
|
|
Year 4
|
20,000
|
|
Year 5
|
5,000
|
a) Calculate the NPV
b) Calculate the IRR (to the nearest percent)
c) Would you accept this project?