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 given in the popup? window, The? purpose/risk classes and preassigned required rates of return are shown in the popup? window....
Determine each? project's risk-adjusted net present value.
Initial investment |
??$220,000 |
??$320,000 |
||
Cash? inflows: |
||||
Year 1 |
???
? $140,000 |
??
? $140,000 |
||
Year 2 |
?????? 40,000 |
??? 140,000 |
||
Year 3 |
??????50,000 |
??? 140,000 |
||
Year 4 |
??????70,000 |
??? 140,000 |
||
Year 5 |
???? 120,000 |
??? 140,000 |
Replacement decision |
99?% |
Modification or expansion of existing product line |
?15% |
Project unrelated to current operations |
17% |
Research and development operations |
?20% |
Please disregard the questions marks! They were an error when I was tranferring the question.
Solution
NPV for project A :
To evaluate this project we consider 99% as its replacement one.
FCFt is the annual free cash flow at time period t
k = required rate of return
IO = inital cash outlay
n = Projects expected life
NPV for project A : (140000*.5025+ 40000*.2525+50000*.1268+70000*.0637+120000*.0320) - 220000
: (70350 + 10100+6340+4459+3840 ) - 220000
: - $124911
NPV for Project B
To evaluate this project we consider 99% as it is project unrelated to current operations.
We will use cumulative discount factor @17% for 5years - 3.199
NPV : (140000*3.199) - 320000
: 447860 - 320000 : $127860
:
Get Answers For Free
Most questions answered within 1 hours.