Answer:
1) Expected annual cash flow for project A= $6750
Expected annual cash flow for project B= $7450
2)
Standard deviation (σ) for A = $158.11
Coefficient of variation for A = 0.0234
Explanation:
1)
For project A
Expected cash flow 1 = 0.2 × $6500 = $1300
Expected cash flow 2 = 0.6 × $6750 = $4050
Expected cash flow 3 = 0.2 × $7000 = $1400
Expected annual cash flow = sum of expected cash flow = $1300 + $4050 + $1400 = $6750
For project B
Expected cash flow 1 = 0.2 × $0 = $0
Expected cash flow 2 = 0.6 × $6750 = $4050
Expected cash flow 3 = 0.2 × $17000 = $3400
Expected annual cash flow = sum of expected cash flow = $0 + $4050 + $3400 = $7450
2) Deviation from mean = cash flow - expected cash flow
Deviation from mean 1 = 6500 - 6750 = 250
Deviation from mean 2 = 6750 - 6750 = 0
Deviation from mean 3 = 7000 - 6750 = -250
Variance (σ²) = Sum of (Deviation from mean² × Probability)
σ² = (250² × 0.2) + (0² × 0.6) + ((-250)² × 0.2) = 12500 + 12500 = 25000
Standard deviation (σ) = √ variance = √25000 = $158.11
Coefficient of variation = Standard deviation / expected annual cash flow = $158.11 / $6750 = 0.0234
