John Q. Enterprises is considering two potential investments. The probability distributions of annual
end-of-year cash flows for the respective projects are:
Project A Project B
Probability Outcome Probability Outcome
0.25 10,000 0.25 12,000
0.50 15,000 0.50 15,000
0.25 20,000 0.25 18,000
Both projects will require an initial outlay of 45,000 and will have an estimated life of 6 years. Project A is
considered a riskier investment and will have to have a risk-adjusted required rate of return of 15, while
Project B's risk-adjusted required rate of return is 12.
a. Determine the expected value of each project's annual cash flow.
b. Determine each project's risk-adjusted net present value.
Question 2
Henry purchased stock in Nortel Networks for 120 per share. Unfortunately the stock did not perform very well in the 3 years that Henry has owned it as it is now trading at 3.93 per share.
Feeling that the value of the stock will only continue to drop, Henry sold his shares today. What annual rate of return did Henry make on his investment?
A) -68
B) -66
C) -67
D) -69
E) -70
John Muir
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Probability Question