Project's risk-adjusted net present value
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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 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 given here:
PROJECT A PROJECT B
Initial investment $250,000 & $400,000
Cash inflows:
Year 1 $130,000 $135,000
Year 2 40,000 135,000
Year 3 50,000 135,000
Year 4 90,000 135,000
Year 5 130,000 135,000
The purpose/risk classes and preassigned required rates of return are as follows:
PURPOSE REQUIRED RATE OF RETURN
Replacement decision 12%
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.
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