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The Wolf company is examining two capital-budgeting projects

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Question. The Wolf company 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 Wolf Company uses the risk-adjusted discount rate method and groups projects according to purpose and then uses a required rate of return or discount rate that has been preassigned to the purpose or risk class. The expected cash flows for these projects are as follows: Project A Project B Initial Investment: 250,000 400,000Cash flows: Year 1 35,000 134,000Year 2 40,000 134,000Year 3 50,000 134,000Year 4 90,000 134,000Year 5 130,000 134,000The purpose or risk classes and preassigned required rates of return are as follows: Purpose Required Rate of Return Replacement decision 12% 12%Modification or expansion of existing product line 15% 15%Project unrelated to current operations 18% 18%research and development operations 20% 20%

 

Paper#62072 | Written in 18-Jul-2015

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