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
follows:

Project A

Project B

initial

$250,000

$400,000

investment

Cash Flow

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 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
line 15
Project unrelated to current operations 18

Research and development operations 20

Determiner the project’s risk-adjusted net present
value.

 

 

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