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

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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

Conscientious Construction Company 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 should Conscientious Construction Company purchase?

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Solution Summary

This solution gauges the risk involved with three independent projects and calculates their projected internal rate of return in order to recommend one for purchase by Conscientious Construction Company.

Solution Preview

Internal rate of return (IRR) refers to the return earned from the project. One should select the projects by comparing IRR with the cost of capital. Project(s) ...

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