Banca Nazionale del Lavoro (BNL), uses a WACC of 10 percent to evaluate average-risk projects, and it adds or subtracts 3 percentage points to evaluate projects of low or high risk. BNL uses coefficient of variation (CV) to measure riskiness of the projects.
Currently, two mutually exclusive projects are under consideration by BNL. Both have a cost of $400,000 and will last 4 years. Project A has a coefficient variable (CV) of 2.30 and will produce annual end of year cash flows of $71,104. Project B, with CV 1.70 will produce cash flows of $146,411 at the end of Years 3 and 4 only.
BNL classifies a project of average-risk, if project’s CV is 2.00.
Required:
Which project BNL should accept. Please show your calculations step by step and explain your approach at each step in five lines.