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 .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%

Answer 1

For project A, we'll use the discount rate of replacement decision which is 11%, as it has been clearly stated that project A is a replacement project. Similiarly, for project B, We'd use 17% discount rate, as it has been clearly stated that project B is unrelated to the current operations.

Coming to the NPV Calculations.

You can simply the use the present value function in excel and then add the Initial outflow to get the net present value.

The excel function is, =NPV(Rate,Value1:Value5) + Initial outflow

Rate is the discount rate(11%/17%), value1:value5 are the cash inflows of the projects and initial outlay has to be then added to this value afterwards.

Or you can use the following formula :-

If we take project B, C_O = 320,000 , C_1-5 = 100,000 ,r = 17%, T=5

If you compute the NPV, You'll get -65.38$.

Same process is to be followed for project A.