Question: Sheila Goodman recently received her MBA from the Harvard Business

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 risk-less 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:


Assume a $184,000 project provides the following inflows with the associated coefficients of variation for each year.


a. Fill in the following table:


b. If the risk-free rate is 5 percent, should this $184,000 project be accepted? Compute the net present value of the adjustedinflows.
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  • CreatedOctober 14, 2014
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