Bikes-B-Rode has performed a risk assessment of independent projects. They adjust for project risk by raising the calculated IRR by 2% for low risk projects, leaving the IRR the same for moderate risk projects, and lowering the calculated IRR by 3% for high risk projects. Without capital rationing, and given their cost of capital of 10%, which projects should Bikes-B-Rode accept? Why? Risk Project Cost NPV IRR Level A $16,000 $ -1,000 8% Low B $28,000 $ 4,000 13% Low C $34,000 $ 4,000 12% Average D $42,000 $ 5,000 12% High

Bikes-B-Rode has performed a risk assessment of independent projects. They adjust for project risk by raising the calculated IRR by 2% for low risk projects, leaving the IRR the same for moderate risk projects, and lowering the calculated IRR by 3% for high risk projects. Without capital rationing, and given their cost of capital of 10%, which projects should Bikes-B-Rode accept? Why? Risk Project Cost NPV IRR Level A $16,000 $ -1,000 8% Low B $28,000 $ 4,000 13% Low C $34,000 $ 4,000 12% Average D $42,000 $ 5,000 12% High

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter16: Country Risk Analysis

Section: Chapter Questions

Problem 20QA

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Pitt Company is considering two alternative investments. The company requires a 12% return from its investments. Neither option has a salvage value. Compute the IRR for both projects and recommend one of them. For further instructions on internal rate of return in Excel, see Appendix C.
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