Business Finance Question

Sigchi4life
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Other
Price: $5 USD

Question description

(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 it uses a required rate of return

or discount rate that has been preassigned 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

$130,000

$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 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

15%

Research and development operations

20%


Tutor Answer

(Top Tutor) Daniel C.
(997)
School: UT Austin
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