Fin – the wolf company
The Wolf company 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 Wolf Company 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 the purpose or risk class. The expected cash flows for these projects are as follows:
Project A Project B
Initial Investment: 250,000 400,000
Cash flows:
Year 1 35,000 134,000
Year 2 40,000 134,000
Year 3 50,000 134,000
Year 4 90,000 134,000
Year 5 130,000 134,000
The purpose or risk classes and preassigned required rates of return are as follows:
Purpose Required Rate of Return
Replacement decision 12% 12%
Modification or expansion of existing product line 15% 15%
Project unrelated to current operations 18% 18%
research and development operations 20% 20%
Determine the project’s risk-adjusted net present value.
