The G.Wolf Corporation is examining two capital-budgeting projects with five year lives.
The G.Wolf Corporation
is examining two capital-budgeting projects with five 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 as
The purpose or 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
Project unrelated to current operations 18
Research and development operations 20
Determiner the project’s risk-adjusted net present