Sheila Goodman recently received her MBA from the Harvard Business School. She has joined the family business, Goodman Software Products Inc., as Vice-President of Finance. She believes in adjusting projects for risk. Her father is somewhat skeptical but agrees to go along with her. Her approach is somewhat different than the risk-adjusted discount rate approach, but achieves the same objective.

She suggests that the inflows for each year of a project be adjusted downward for lack of certainty and then be discounted back at a risk-free rate. The theory is that the adjustment penalty makes the inflows the equivalent of risk-less inflows, and therefore a risk-free rate is justified.

A table showing the possible coefficient of variation for an inflow and the associated adjustment factor is shown next:

Assume a $184,000 project provides the following inflows with the associated coefficients of variation for each year.

a. Fill in the following table:

b. If the risk-free rate is 5 percent, should this $184,000 project be accepted? Compute the net present value of the adjustedinflows.

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Coefficient of Variation 0-.25. 26-50. 51-75 76 1.00. 1.01 125. Adjustment Factor .90 80 70 60 .50 Inflow S32,200 59,500 79,900 59,200 65,5600 Year Coefficient of Variation 12 .28 45 .79 1.15 Coefficient of Adjustment Adjusted Factor Year Inflow Variation $32,200 59,500 79,900 Inflow 12 .28 45 79 1.15 ....59,200 65,600