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