The manager of a company has two alternative investment projects. Project A involves the introduction of...

Transcribed Image Text:

The manager of a company has two alternative investment projects. Project A involves the introduction of a higher quality version of its traditional product, and project B for an introduction of a new business line. The two projects involve the following expected stream of net cash flows and initial outlays. Net Cash Outflows () Investment Year 1 A B Year 2 Year 3 Initial Outlay () 40,000 40,000 60,000 30,000 80,000 50,000 110,000 104,000 a. Calculate the net present value of each investment project with the basic risk-froo discount rate of 8%. (10 marks) b. Which of the two projects should the manager adopt if the risk premium is 2% on project A and 6% on project B? (5 marks) The manager of a company has two alternative investment projects. Project A involves the introduction of a higher quality version of its traditional product, and project B for an introduction of a new business line. The two projects involve the following expected stream of net cash flows and initial outlays. Net Cash Outflows () Investment Year 1 A B Year 2 Year 3 Initial Outlay () 40,000 40,000 60,000 30,000 80,000 50,000 110,000 104,000 a. Calculate the net present value of each investment project with the basic risk-froo discount rate of 8%. (10 marks) b. Which of the two projects should the manager adopt if the risk premium is 2% on project A and 6% on project B? (5 marks)

Answer rating: 100% (QA)

The detailed answer for the above question is provided below a Net Present Value of Project A Net Ca... View the full answer