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    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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    https://brainmass.com/business/net-present-value/project-s-risk-adjusted-net-present-value-185422

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