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 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.

Answer #1

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...

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5. As the director of capital budgeting for Bissett Corporation,
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0
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Cash FlowsCash Flows
YearProject AProject B
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1 200 5,000
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