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 .The purpose/risk classes and preassigned required rates of return are shown in the Determine each project's risk-adjusted net present value.
PROJECT A PROJECT B
Initial investment -220,000 -320,000
Cash inflows:
A B
Year 1 150,000 100,000
Year 2 20,000 100,000
Year 3 50,000 100,000
Year 4 80,000 100,000
Year 5 120,000 100,000
PURPOSE REQUIRED RATE OF RETURN
Replacement decision 11%
Modification or expansion of existing product line 15%
Project unrelated to current operations 17%
Research and development operations 20%