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please answer all 7 questions and thx Global Resources Roger Mills, the Vice President of Finance of Global Resources, was concerned about the fact that
please answer all 7 questions and thx
Global Resources Roger Mills, the Vice President of Finance of Global Resources, was concerned about the fact that Global Resources used one discount rate to craluate all projects. Currently that rate was 10 percent. He know certain projects were riskier than others, and he felt they should carry a higher discount rate (hurdlo rato) than more conservative projects. The firm had just hired Jennifer Morrison, an MBA from the Desautels School at McGill University (at a starting salary of 150,000 a year). Roger felt with her education and training, she should bo able to provide some meaningful suggestions. Jennifer said, "There are several ways to account for risk in the capital budgeting process, but the most widely used method by the Top 500 companies in Cartada is the risk-adjusted discount rate approach. You set up different risk categories in the corporate capital budgeting manual and ypocify an appropriate discount rate for each: One of the case studies sho had used fat the Desautels School actually specified risk categories as shown in Figure 1. Jennifer also addod discount rates based on the risk level that might be appropriate for Global Resources. Figure 1 Risk-Adjusted Discount Rates for Global Resources She proposed that Roger compare the current method and the risk-adjusted discount rate approach based on two pending proposals. Project A called for introducing a new high-grade fuel in the domestic market and would require a discount rate of 13 percent based on Figure 1. Project B called for the introduction of a well-established automatic wheel adjustor in the Asian markets and would require a discoumt rate of 17 percent based on Figure 1. The cash flows from the two projects are shown in Figure 2. Figure 2 Risk-Adjusted Discount Rates for Global Resources Roger was very pleased with Jennifer's suggestion and prepared to compute the returns. Just as he was beginning, Tai Ming, the Director of Foreign Operations, walked into the room and examined the new proposal. Tai explained, "Foreign investments should not have a higher discount rate than domestic projects simply because they are riskier." He suggested that foreign investment brought diversity into the firm's portfolio of investments and actually reduced total corporate risk. He went so far as to suggest they might justify a 'lower discount rate.' As an example, he suggested that while the U.S. economy was in a recession in 2001-2002, many Asian economies were booming and investments there reduced risk. Roger was appreciative of Tai's input but decided to run the numbers first based on current practices and Jennifer's suggestions and then further evaluate the ments of Tai's international diversification arguments. Required 1. Compute the present value of the two investments in Figure 2 based on the current non risk-adjusted discount rate of 10 percent. Which of the two is superior? 2. Compute the present value of Investment A based on a riskadjusted discount rate at 13 percent as applied to a new product in the domestic market. 3. Compute the present value of Investment B based on risk-adjusted discount rate of 17 Tpercent as applied to introducing an established product in a foreign market. 4. Which of the two is superior under the risk-adjusted discount rate approach as utilized in questions two and three? 5. If the two projects were mutually exclusive, what would your decision be based on the analysis under the risk-adjusted discount rate approach? 6. If the two projects were non-mutually exclusive, and there was no capital rationing, what would your decision be based on the analysis under the risk-adjusted discount rate approach? 7. Do you agree with Tai Ming's arguments about the impact of international diversification on the discount rate? Note: there is no anticipated correct answer to this question. Please just give your opinion Step by Step Solution
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