Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 11, Problem 20SP
(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:
The purpose/risk classes and preassigned required
Determine each project’s risk-adjusted
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Moses Manufacturing is attempting to select the best of three mutually exclusive projects, X, Y, and Z. Although all the projects have
5-year
lives, they possess differing degrees of risk. Project X is in class V, the highest-risk class; project Y is in class II, the below-average-risk class; and project Z is in class III, the average-risk class. The basic cash flow data for each project and the risk classes and risk-adjusted discount rates (RADRs) used by the firm are shown in the following tables.
Project X
Project Y
Project Z
Initial investment
(CF0)
$179,000
$235,000
$312,000
Year
(t )
Cash inflows
(CFt)
1
$80,000
$56,000
$85,000
2
66,000
68,000
85,000
3
62,000
73,000
85,000
4
55,000
84,000
85,000
5
65,000
96,000
85,000
Risk Classes and RADRs
Risk Class
Description
Risk adjusted…
Assume the following information for a capital budgeting proposal with a five-year time horizon:
Initial investment:
Cost of equipment (zero salvage value)
$ 550,000
Annual revenues and costs:
Sales revenues
$ 300,000
Variable expenses
$ 130,000
Depreciation expense
$ 50,000
Fixed out-of-pocket costs
$ 40,000
Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided.
This proposal’s internal rate of return is closest to:
Multiple Choice
5%.
10%.
3%.
8%
Assume the following information for a capital budgeting proposal with a five-year time horizon:
Initial investment:
Cost of equipment (zero salvage value)
$ 460,000
Annual revenues and costs:
Sales revenues
$ 300,000
Variable expenses
$ 130,000
Depreciation expense
$ 50,000
Fixed out-of-pocket costs
$ 40,000
Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided.
This proposal’s internal rate of return is closest to:
Chapter 11 Solutions
Foundations Of Finance
Ch. 11.A - Prob. 1MCCh. 11.A - Prob. 2MCCh. 11 - Prob. 1RQCh. 11 - Prob. 2RQCh. 11 - If a project requires an additional investment in...Ch. 11 - Prob. 4RQCh. 11 - Prob. 5RQCh. 11 - Prob. 6RQCh. 11 - Prob. 1SPCh. 11 - (Relevant cash flows) Captins Cereal is...
Ch. 11 - Prob. 3SPCh. 11 - Prob. 4SPCh. 11 - Prob. 5SPCh. 11 - Prob. 6SPCh. 11 - Prob. 7SPCh. 11 - Prob. 9SPCh. 11 - Prob. 10SPCh. 11 - Prob. 11SPCh. 11 - Prob. 12SPCh. 11 - Prob. 15SPCh. 11 - (Real options and capital budgeting) You have come...Ch. 11 - (Real options and capital budgeting) Go-Power...Ch. 11 - (Real options and capital budgeting) McDoogals...Ch. 11 - (Risk-adjusted NPV) The Hokie Corporation is...Ch. 11 - (Risk-adjusted discount rates and risk classes)...Ch. 11 - Prob. 1MCCh. 11 - Prob. 2MCCh. 11 - Prob. 3MCCh. 11 - Prob. 7MCCh. 11 - Prob. 8MCCh. 11 - Prob. 9MCCh. 11 - Should the project be accepted? Why or why not?Ch. 11 - Prob. 11MCCh. 11 - Prob. 12MCCh. 11 - Prob. 13MCCh. 11 - Prob. 14MC
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