Assume the financial manager of the Sanders Electric Company in Problem 6 believes that Project M is comparable in risk to the firm’s other assets. In contrast, there is greater uncertainty concerning Project O’s after-tax cash inflows. Sanders Electric uses a 4 percentage point risk premium for riskier projects. The firm’s cost of capital is 10 percent.
a. Determine the risk-adjusted net present values for Project M and Project O, using risk-adjusted discount rates where appropriate.
b. Are both projects acceptable investments? Which one would you choose?