26 Jun BUDGETING PROJECTS
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 18 Research and development operations 20 Determine each projects risk-adjusted net present value. Can someone please answer this and explain what/why was done? Thanks. •
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