Recall that the net present value npv is a procedure for

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Recall that the net present value (NPV) is a procedure for evaluating consequences that yield cash flows at different points in time. If xi is the cash flow at year i and r is the discount rate, then the NPV is given by: NPV = ? (xi / (1+r)i ) where the summation is over all future cash flows including the current time x0. a. Suppose that you can invest in one of the two different projects. Each costs $20,000. The first project is riskless and will pay you $10,000 each year for the next 3 years. The second one is risky and there is 50% chance that it will pay $15,000 each year for the next 3 years and a 50% chance that it will pay only $5,000 each year for the next 3 years. Your discount rate is 9%. Calculate the NPV for both projects. What can you conclude about the use oaf NPV for deciding among risky projects? Discuss in terms of risk attitudes.

Reference no: EM13613844

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