Explore BrainMass

Explore BrainMass

    Risk-adjusted NPV for G. Wolfe Corporation

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    See attachment.

    (Risk-adjusted discount rates and risk classes) 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 pre-assigned 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 $ 30,000 $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 pre-assigned 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.

    © BrainMass Inc. brainmass.com June 3, 2020, 9:32 pm ad1c9bdddf
    https://brainmass.com/business/net-present-value/risk-adjusted-npv-for-g-wolfe-corporation-187709

    Attachments

    Solution Preview

    Please see the attached file

    (Risk-adjusted discount rates and risk classes) 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 pre-assigned to that purpose or risk class. The expected ...

    Solution Summary

    The solution explains how to use risk adjusted discount rates in capital budgeting decisions using the example of G.Wolfe corporation

    $2.19

    ADVERTISEMENT