Question

​(​Risk-adjusted NPV​) The Hokie Corporation is considering two mutually exclusive projects. Both require an initial outlay of ​$13, 000 and will operate for 7 years. Project A will produce expected cash flows of ​$4,000 per year for years 1 through 7​, whereas project B will produce expected cash flows of ​$5,000 per year for years 1 through 7. 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 16 percent to its evaluation but only a required rate of return 7 percent to project A. Determine each​ project's risk-adjusted net present value.

What is the​ risk-adjusted NPV of project​ A?

Answer 1

Risk-adjusted NPV for Project A is $ 8,557.

Project A
	Cash Flow (C)	PV Factor Calculation	PV Factor @ 7 % (F)	PV (= C x F)
0	$ (13,000)	1/(1.07)^0	1	$         (13,000)
1	$      4,000	1/(1.07)^1	0.934579439	$              3,738
2	$     4,000	1/(1.07)^2	0.873438728	$              3,494
3	$     4,000	1/(1.07)^3	0.816297877	$              3,265
4	$     4,000	1/(1.07)^4	0.762895212	$              3,052
5	$     4,000	1/(1.07)^5	0.712986179	$              2,852
6	$     4,000	1/(1.07)^6	0.666342224	$              2,665
7	$     4,000	1/(1.07)^7	0.622749742	$              2,491
			NPV	$              8,557

Risk-adjusted NPV for Project B is $ 7,193.

Project B
Year	Cash Flow (C)	PV Factor Calculation	PV Factor @ 16 % (F)	PV (= C x F)
0	$ (13,000)	1/(1.16)^0	1	$         (13,000)
1	$     5,000	1/(1.16)^1	0.862068966	$              4,310
2	$     5,000	1/(1.16)^2	0.743162901	$              3,716
3	$     5,000	1/(1.16)^3	0.640657674	$              3,203
4	$     5,000	1/(1.16)^4	0.552291098	$              2,761
5	$    5,000	1/(1.16)^5	0.476113015	$              2,381
6	$    5,000	1/(1.16)^6	0.410442255	$              2,052
7	$     5,000	1/(1.16)^7	0.35382953	$              1,769
			NPV	$              7,193