Question

The G. Wolfe Corporation is examining two? capital-budgeting projects with? 5-year lives. The? first, project? A,...

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.

Homework Answers

Answer #1

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

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