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Sheila Goodman recently received her MBA from the Harvard Business School. She has joined the family business, Goodman Software Products Inc., as Vice-President of Finance.

Sheila Goodman recently received her MBA from the Harvard Business School. She has joined the family business, Goodman Software Products Inc., as Vice-President of Finance. She believes in adjusting projects for risk. Her father is somewhat skeptical but agrees to go along with her. Her approach is somewhat different than the risk-adjusted discount rate approach, but achieves the same objective. She suggests that the inflows for each year of a project be adjusted downward for lack of certainty and then be discounted back at a risk-free rate. The theory is that the adjustment penalty makes the inflows the equivalent of riskless inflows, and therefore a risk-free rate is justified.

A table showing the possible coefficient of variation for an inflow and the associated adjustment factor is shown next:

Coefficient of Variation Adjustment Factor
0 .25 .90
.26 .50 .80
.51 .75 .70
.76 1.00 .60
1.01 1.25 .50

Assume a $125,000 project provides the following inflows with the associated coefficients of variation for each year.

Year Inflow Coefficient of Variation
1 $ 38,700 .15
2 51,200 .23
3 78,200 .48
4 58,900 .75
5 66,500 1.05

Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Fill in the table below: (Do not round intermediate calculations. Round your dollar answers to the nearest whole dollar.)

b-1. If the risk-free rate is 6 percent, compute the net present value of the adjusted inflows. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

b-2. Should this project be accepted?

No
Yes

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