Dandy Products, Denver Corp, The Seattle Corp: ROR, cost of capital, NPV, IRR
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1. Dandy Product's overall weighted average required rate of return is 10%. Its yogurt division is riskier than average, its fresh produce division has average risk, and its institutional foods division has below-average risk. Dandy adjusts for both divisional and project risk by adding or subtracting 2% points. Thus, the maximum adjustment is 4% points. What is the risk-adjusted required rate of return for a low-risk project in the yogurt division?
2. As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:
Project X Project Z
Year Cash Flow Cash Flow
0 -100,000 -100,000
1 50,000 10,000
2 40,000 30,000
3 30,000 40,000
4 10,000 60,000
Denver's cost of capital is 15%.
What is Project X's & Z's IRR and NPV?
Which project would you choose?
3. The Seattle Corporation has been presented with an investment opportunity that will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10%. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment?
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