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Capital Budgeting: Conscientious Construction Company

The capital budgeting manager of Conscientious Construction Company (CCC) submitted the following report to the CFO:

Project IRR Risk
A 9.0% Low
B 10.0 Average
C 12.0 High

CCC generally takes risk into consideration by adjusting its average required rate of return (r), which equals 8 percent, when evaluating projects with risks that are either substantially lower or substantially higher than average. A 5 percent adjustment is made for high-risk projects, and a 2 percent adjustment is made for low-risk projects. If the above projects are independent, which project(s) should CCC purchase?

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Project IRR Risk
A 9.0% Low
B 10.0 Average
C 12.0 High

CCC generally takes risk into consideration by adjusting its average required rate of return ...

Solution Summary

Your tutorial shows you how to adjust the criteria rate and then gives you the reason for each decision.

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