John Q. Enterprises is considering two potential investments. The probability distributions of annual

end-of-year cash flows for the respective projects are:

Project A Project B
Probability Outcome Probability Outcome
0.25 $10,000 0.25 $12,000
0.50 $15,000 0.50 $15,000
0.25 $20,000 0.25 $18,000
Both projects will require an initial outlay of $45,000 and will have an estimated life of 6 years. Project A is
considered a riskier investment and will have to have a risk-adjusted required rate of return of 15%, while
Project B's risk-adjusted required rate of return is 12%.
a. Determine the expected value of each project's annual cash flow.
b. Determine each project's risk-adjusted net present value.

Project A Project B
a. $15,000 $15,000
b. $11,767.24 $16,671.11