Risk-adjusted discount rates

Reference no: EM13966968

Risk-Adjusted Discount Rates. One-Hour Dryclean, Inc., is contemplating replacing an obsolete dry-cleaning machine with one of two innovative pieces of equipment. Alternative 1 requires a current investment outlay of $25,373, whereas alternative 2 requires an outlay of $24,199. The following cash flows (cost savings) will be generated each year over the new machines' 4-year lives:

	Probability	Cash Flow
Alternative 1	0.18	$ 5,000
	0.64	10,000
	0.18	15,000
Alternative 2	0.125	$ 8,000
	0.75	10,000
	0.125	12,000

A. Calculate the expected cash flow for each investment alternative.

B. Calculate the standard deviation of cash flows (risk) for each investment alternative.

C. The firm will use a discount rate of 12% for the cash flows with a higher degree of dispersion and a 10% rate for the less risky cash flows. Calculate the expected net present value for each investment. Which alternative should be chosen?

Reference no: EM13966968

Questions Cloud

Calculate the expected value-standard deviation : Each restaurant would require a capital expenditure of $700,000, plus land acquisition costs of $500,000 for Albuquerque and $1 million for Santa Fe. The company uses the 10% yield on risk- less U.S. Treasury bills to calculate the risk-free annua..

Essay on employment issues hiring promotions and termination : Write an essay on Employment Issues: Hiring, Promotions, and Terminations. Describe how managers can address the inherent ethical dimensions of this situation.

Describe the image receptor response curve for cr. : The Physics of Radiology shows the MTF of a screen film for mammography and the MTF of a high-speed screen-film (curves C and D, panel b). Give two physical reasons why the mammography screen-film has a higher geometric resolution.

Technical journal for your current or planned field of work : Find a technical journal for your current or planned field of work, and write an executive summary of one of the major articles in it. You may use a hard copy or an electronic format of a journal of your choice

Risk-adjusted discount rates : One-Hour Dryclean, Inc., is contemplating replacing an obsolete dry-cleaning machine with one of two innovative pieces of equipment. Alternative 1 requires a current investment outlay of $25,373, whereas alternative 2 requires an outlay of $24,199..

What type of crimes are being highlighted : A weekly journal of what you watch on television, read in the newspaper, or see in the movies that is related to ANY aspect of the criminal justice system. English News! Students should make note of all CJS workers that are portrayed, What type of ..

Write an essays on privacy in the workplace : Write an essays on Privacy in the Workplace. Research the topic and locate one article from the EC Virtual Library that addresses that category of privacy.

Different types of foreign investment : Describe the ways in which international business has changed over the last 50 years. Include the concepts of an MNC and the different types of foreign investment. Be specific. Give examples.

Problem regarding the expected value : Duddy Kravitz, a broker with Caveat Emptor, Ltd., offers free investment seminars to local PTA groups. On average, Kravitz expects 1% of seminar participants to purchase $25,000 in tax-sheltered investments and 5% to purchase $5,000 in stocks and ..

User Account

All Pages