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Explain Computing net present value for two mutually exclusive projects

A firm's cost of capital is 9% per annum and it is considering two mutually exclusive, standalone investments. The projects each cost $10,000 and the company has exactly this amount to invest. Project Alpha has a standard deviation of 4.5% (the same as the firm's typical project and Project Gamma has a standard deviation of 8%, which requires an additional 3% risk add-on to the base discount rate. The firm must invest in one of these projects. Which one should it choose? Explain clearly the quantitative reason(S) for your conclusion.

Project Cost ($) Cash flow1 ($) Cash flow2 ($) Cash flow3 ($)

Alpha $10,000 $2,000 $5,000 $7,000

Gamma $10,000 $6,000 $7,000 $3,000

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M9163580

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