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Risk Adjusted NPV: The Hokie Corporation

The Hokie Corporation is considering two mutually exclusive projects. Both require an initial outlay of $10,000 and will operate for 5 years. Project A will produce expected cash flows of $5,000 per year for years 1 through 5, whereas project B will produce expected cash flows of $6,000 per year for years 1 through 5. Because project B is the riskier of the two projects, the management of Hokie Corporation has decided to apply a required rate of return of 15 percent to its evaluation but only a 12 percent required rate of return to project A. Determine each project's risk-adjusted net present value. Please show all calculations, formulas, and details and send via Word document.

Solution Preview

Project A costs $10,000, r = 12%
NPV = CF0 + + + + +
= -10,000 + 4,464.29 + 4,000 + 3,571.43 + 3,184.71 + 2,840.91
= $8061.34
Year 0 1 2 3 4 5
|--------------|------------|-------------|------------|-----------|
-10,000 5,000 5,000 ...

Solution Summary

The risk adjusted NPV for Hokie Corporation is determined.

$2.19