Ormsbee Aviation, Inc., is considering two potential investments. Each project will cost $70,000 and have an expected life of five years. The CFO has estimated the probability distributions for each project's cash flows as shown in the following table.
Probability Project 1 Project 2
25% $15,000 $12,000
50% 25,000 30,000
25% 35,000 48,000
The company believes that the probability distributions apply to each year of the five years of the projects' lives. Ormsbee Aviation uses the risk-adjusted discount rate technique to evaluate potential investments. As a guide for assigning the risk premiums, the CFO has put together the following table based on the coefficient of variation.
Coefficient of Variation Risk Premium
0.00 -2.00%
0.20 0.00%
0.30 2.00%
0.40 3.00%
0.50 4.00%
a. find out the expected cash flows, standard deviation, and coefficient of variation for each project.