The BioTek Corporation has a basic cost of capital of
The BioTek Corporation has a basic cost of capital of 15 percent and is considering investing in either or both of the following projects. Project HiTek will require an investment of $453,000, while Project LoTek’s investment will be $276,000. The following after-tax cash flows (including the investment outflows in year zero) are estimated for each project.
a. Determine the present value of the cash inflows for each project and then calculate their net present values by subtracting the appropriate dollar amount of capital investment. Which, if either, of the projects is acceptable?
b. Calculate the internal rates of return for Project HiTek and Project LoTek. Which project would be preferred?
c. Now assume that BioTek uses risk-adjusted discount rates in order to adjust for differences in risk among different investment opportunities. BioTek projects are discounted at the firm’s cost of capital of 15 percent. A risk premium of 3 percentage points is assigned to LoTek types of projects, while a 6-percentage point risk premium is used for projects similar to HiTek. Determine the risk-adjusted present value of the cash inflows for LoTek and HiTek and calculate their risk-adjusted net present values. Should BioTek invest in either or even both HiTek and LoTek projects?
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