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Capital Budgeting: Conscientious Construction Company

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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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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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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 ...

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