Question
(Risk-adjusted discount rates and risk classes) The G. Wolfe Corporation is examining two capital-budgeting projects with 5-year lives. The first, project A, is a replacement
(Risk-adjusted discount rates and risk classes)
The G. Wolfe Corporation is examining two capital-budgeting projects with 5-year lives. The first, project A, is a replacement project; the second, project B, is a project unrelated to current operations. The G. Wolfe Corporation uses the risk-adjusted discount rate method and groups projects according to purpose, and then it uses a required rate of return or discount rate that has been preassigned to that purpose or risk class. The expected cash flows for these projects are,
PROJECT A PROJECT B Initial investment -280,000 -320,000 Cash inflows: Year 1 100,000 150,000 Year 2 40,000 150,000 Year 3 40,000 150,000 Year 4 90,000 150,000 Year 5 100,000 150,000
.The purpose/risk classes and preassigned required rates of return are,
PURPOSE REQUIRED RATE OF RETURN Replacement decision 11% Modification or expansion of existing product line 15% Project unrelated to current operations 18% Research and development operations 20%
.
Determine each project's risk-adjusted net present value.
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