G125

12,GGG

A. Calculate the expected cash flow for each investment alternative.

A. Calculate the expected cash flow for each investment alternative.

B. Calculate the standard deviation of cash flows (risk) for each investment alternative.

C. The firm will use a discount rate of 12% for the cash flows with a higher degree of dispersion and a 10% rate for the less risky cash flows. Calculate the expected net present value for each investment. Which alternative should be chosen?

P14.7 Certainty Equivalent Method. Tex-Mex, Inc., is a rapidly growing chain of Mexican food restaurants. The company has a limited amount of capital for expansion and must carefully weigh available alternatives. Currently, the company is considering opening restaurants in Santa Fe or Albuquerque, New Mexico. Projections for the two potential outlets are as follows:

Annual Profit

City Outcome Contribution Probability

Annual Profit

City Outcome Contribution Probability

Albuquerque

Failure

$100,000

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