The G. Wolfe Corporation is examining two capital- budgeting projects with 5-yea

Question

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 project

Explanation / Answer

Proj A id for replacemnt decision. So cost of capital is 12%
NPV = NPV(rate, CFs) +CF0 = NPV(12%,130000,40000,50000,90000,130000)-250000
ie NPV of Proj A = $64,510

Proj B is unrelated to current operations. Its cost of cpaital is 18%
NPVB= NPV(rate, CFs) +CF0 = NPV(18%,135000,135000,135000,135000,135000)-400000
ie NPV b= $22,168

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