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(​Risk-adjusted NPV​) The Hokie Corporation is considering two mutually exclusive projects. Both require an initial outlay...

(​Risk-adjusted NPV​) The Hokie Corporation is considering two mutually exclusive projects. Both require an initial outlay of ​$13,000 and will operate for 9 years. Project A will produce expected cash flows of ​$5,000 per year for years 1 through 9​, whereas project B will produce expected cash flows of ​$6,000 per year for years 1 through 9. Because project B is the riskier of the two​ projects, the management of Hokie Corporation has decided to apply a required rate of return of 15 percent to its evaluation but only a required rate of return 9 percent to project A. Determine each​ project's risk-adjusted net present value.

What is the​ risk-adjusted NPV of project​ A?
​$______  ​(Round to the nearest​ cent.)
What is the​ risk-adjusted NPV of project​ B?
​$______ ​(Round to the nearest​ cent.)

Solutions

Expert Solution

The risk-adjusted NPV of PROJECT-A

Year

Annual Cash Flow ($)

Present Value factor at 9%

Present Value of Cash Flow ($)

1

5,000

0.917431

4,587.16

2

5,000

0.841680

4,208.40

3

5,000

0.772183

3,860.92

4

5,000

0.708425

3,542.13

5

5,000

0.649931

3,249.66

6

5,000

0.596267

2,981.34

7

5,000

0.547034

2,735.17

8

5,000

0.501866

2,509.33

9

5,000

0.460428

2,302.14

TOTAL

29,976.23

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $29,976.23 - $13,000

= $16,976.23

The risk-adjusted NPV of PROJECT-B

Year

Annual Cash Flow ($)

Present Value factor at 15%

Present Value of Cash Flow ($)

1

6,000

0.869565

5,217.39

2

6,000

0.756144

4,536.86

3

6,000

0.657516

3,945.10

4

6,000

0.571753

3,430.52

5

6,000

0.497177

2,983.06

6

6,000

0.432328

2,593.97

7

6,000

0.375937

2,255.62

8

6,000

0.326902

1,961.41

9

6,000

0.284262

1,705.57

TOTAL

28,629.50

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $28,629.50 - $13,000

= $15,629.50

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.


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