Question
Kerry Manufacturing Inc uses a cost of capital of 11 percent to evaluate average risk project and it adds or subtracts 3 percent to adjust
Kerry Manufacturing Inc uses a cost of capital of 11 percent to evaluate average risk project and it
adds or subtracts 3 percent to adjust for risk. Currently, the firm has two mutually exclusive projects
under consideration. Both the projects have an initial cost of $100,000 and will last four years.
Project A, riskier than average, will produce an annual cash flow of $72,164 at the end of each year.
Project B, of less than average risk, will produce cash flows of $145,340 at the end of Years 3 and 4 only.
Which investment should firm choose and why?
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