Imagine that you are the new CFO of Conestoga International Inc. In your first week on the job, you

discover that Conestoga International Inc. has been using a single discount rate in the evaluation of all

projects, which is currently set at $10\%.$

You began to wonder if the risker projects should have a higher discount rate than more conservative

ones. Afterall, some projects are certainly riskier than others, and there must be a way to incorporate

risk level in an investment decision.

You remember from your finance background that there is a way to account for risk in the capital

budgeting process, so you established different risk categories and an associated discount rate for each

category $($See Figure $1).$

Figure $1-$ Risk Adjusted Discount Rates

Currently, Conestoga International Inc. is deciding on whether to pursue two projects. Both projects

require a $$200,000$ investment in equipment. Additional details about each project is below:.

Project A: Introduce New Product in Domestic Market

Discount rate $13\%$ based on Figure $1$

Working capital requirements of $$20,000$ to operationally support the project

Project B: Introduction of a well established in foreign market