Probability
Investment B Investment C
Probability
After Tax
Cash Flow
Probability
After Tax
Cash Flow
0.25
$20,000
0.30
$22,000
0.50
32,000
0.50
40,000
0.25
40,000
0.20
50,000
What is the expected value of each project’s annual after tax cash flow? Justify your answers and identify any conflicts between the IRR and the NPV and explain why these conflicts may occur.
Assuming that the appropriate discount rate for projects of this risk level is 8%, what is the risk-adjusted NPV for each project? Which project, if either, should be selected? Justify your conclusions.
Turn in your completed work to the Submissions Area by the due date assigned.
Assignment 1 Grading Criteria Maximum Points Correctly calculated the cost of new equity and explained the calculations, as well as the advantages and disadvantages of using this type of financing for the firm. (CO4) 20 Correctly calculated the cost of new debt and explained the calculations, as well as the advantages and disadvantages of using this type of financing for the firm. (CO4) 20 Correctly calculated the weighted average cost of capital and explained how and why it is used in the capital budgeting process. (CO4) 20 Correctly calculated the annual cash flows for the projects and explained the methods used in the calculations. (CO1) 44 Evaluated the projects using the NPV method and came to the correct conclusions based on the decision rules for the NPV. (CO2) 44 Evaluated the projects using the IRR method and came to the correct conclusion based on the decision rules for the IRR. Identified any conflicts between the IRR and the NPV and explained why these conflicts may occur. (CO 3) 44 Correctly introduced risk into the evaluation by using the expected values as the cash flows and evaluated these cash flows using risk adjusted discounted rates. (CO 5) 44 Written in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation. 64 Total: 300
