91影视

Sheila Goodman recently received her MBA from the Harvard Business School. She has joined the family business, Goodman Software Products Inc., as vice president of finance.

She believes in adjusting projects for risk . Her father is somewhat skeptical but agrees to go along with her. Her approach is somewhat different than the risk-adjusted discount rate approach, but achieves the same objective.

She suggests that the inflows for each year of a project be adjusted downward for lack of certainty and then be discounted back at a risk-free rate. The theory is that the adjustment penalty makes the inflows the equivalent of riskless inflows, and therefore a risk-free rate is justified.

A table showing the possible coefficient of variation for an inflow and the associated adjustment factor is shown next:

Coefficient of Variation Adjustment Factor

0鈥�0.25 0.90

0.26鈥�0.50 0.80

0.51鈥�0.75 0.70

0.76鈥�1.00 0.60

1.01鈥�1.25 0.50

Assume a \(184,000 project provides the following inflows with the associated coefficients of variation for each year:

Year Inflow Coefficient of Variation

1 \)32,200 0.12

2 59,500 0.28

3 79,900 0.45

4 59,200 0.79

1. 65,600 1.15

A Fill in the following table:

Year Inflow Coefficient of Variation Adjustment Factor Adjusted Inflow

1 \(32,200 0.12

2 59,500 0.28

3 79,900 0.45

4 59,200 0.79

5 65,600 1.15

b. If the risk-free rate is 5 percent, should this \)184,000 project be accepted? Compute the net present value of the adjusted inflows

Step by step solution

01

(a) Completion of the table

Goodman Software Products

Adjusted Inflows

Year	Inflows ($)	Coefficient of variation	Adjustment factor	Adjusted Inflow ($)
1	32,200	0.12	0.90	28,980
2	59,500	0.28	0.80	47,600
3	79,900	0.45	0.70	55,930
4	59,200	0.79	0.60	35,520
5	65,600	1.15	0.50	32,800

02

Computation of net present value

Year	Adjusted Inflow ($)	PV at 5%	Present Value ($)
1	28,980	0.952	27,589
2	47,600	0.907	43,173
3	55,930	0.864	48,324
4	35,520	0.823	29,233
5	32,800	0.784	25,715

Present Value of adjusted inflows	174,034
Present value of outflows	184,000
Net Present Values	-$9,966

The net present value of the project is computed as -$9,966, which means the project has a negative present value. SO, this project should not be accepted.

Unlock Step-by-Step Solutions & Ace Your Exams!

• Full Textbook Solutions

  Get detailed explanations and key concepts

• Unlimited Al creation

  Al flashcards, explanations, exams and more...

• Ads-free access

  To over 500 millions flashcards

• Money-back guarantee

  We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!