An evaluation of four independent capital budgeting projects by the director of capital budgeting for Ziker Golf Company yielded the following results: The firm's weighted average cost of capital is 12 percent.Ziker Golf generally evaluates projects that are riskier than average by adjusting its required rate of return by 4 percent, whereas projects with less-than-average risk are evaluated by adjusting the required rate of return by 2 percent.Which project(s) should the firm purchase?

Question

An evaluation of four independent capital budgeting projects by the director of capital budgeting for Ziker Golf Company yielded the following results:  The firm's weighted average cost of capital is 12 percent.Ziker Golf generally evaluates projects that are riskier than average by adjusting its required rate of return by 4 percent, whereas projects with less-than-average risk are evaluated by adjusting the required rate of return by 2 percent.Which project(s) should the firm purchase?

Quizplus · Accepted Answer

To determine the net present value (NPV) for each project, the cash flows for each year were discounted at the appropriate rate (12% + adjustment for risk).

Project E: NPV = -$304,729 (12% + 4% adjustment for risk)
Project L: NPV = $1,320,407 (12% + 2% adjustment for risk)
Project M: NPV = $429,572 (12% + 2% adjustment for risk)
Project N: NPV = -$118,266 (12% + 4% adjustment for risk)

Based on these calculations, only projects L and M have positive NPVs, indicating that they would add value to the firm. Therefore, the best choice(s) would be C) Projects L and M.

An Evaluation of Four Independent Capital Budgeting Projects by the Director