A college intern working at Anderson Paints evaluated potential investments using the firms average required rate of return (r) as the discount rate in the evaluation process and he produced the following report for you as the capital budgeting manager at Anderson Paints:

Project NPV IRR Risk

LOM $1,500 12.5% High

QUE 0 11.0 Low

YUP (800) 10.0 Average

DOG (150) 9.5 Low

As the capital investment manager you must account for the risks associated with capital budgeting projects before making final recommendations and decisions. The companys capital investment risk management policy calls for an adjustment of the firms average required rate of return by plus/minus 2% if a projects risk deviates from the firms average risk classification. The table above shows the estimated profitability of each project using the average required rate of return of the company and disregarding any deviation of each projects risk from the firms average.

Your job as the capital investment manager is to account for differences in risk in each project according to companys policy and to make recommendations regarding the acceptability or non-acceptability of each potential investment as part of the upcoming proposed firms capital budget. First, explain how you would adjust each projects required rate of return for risk using the risk management policy of the company and discuss the appropriateness of the firms risk management policy. Second, insert a column in the table above showing the appropriate risk-adjusted required rate of return or discount rate for each project. Third, explain which of the projects listed above you would recommend and why for the upcoming firms capital investment budget..