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What is the risk-adjusted required rate of return

Problem 1. Dandy Product's overall weighted average required rate of return is 10%. Its yogurt division is riskier than average, its fresh produce division has average risk, and its institutional foods division has below-average risk. Dandy adjusts for both divisional and project risk by adding or subtracting 2% points. Thus, the maximum adjustment is 4% points. What is the risk-adjusted required rate of return for a low-risk project in the yogurt division?

Problem 2. As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:

Project X Project Z

Year Cash Flow Cash Flow

0 -100,000 -100,000

1 50,000 10,000

2 40,000 30,000

3 30,000 40,000

4 10,000 60,000

Denver's cost of capital is 15%.

What is Project X's & Z's IRR and NPV?

Which project would you choose?

Problem 3. The Seattle Corporation has been presented with an investment opportunity that will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10%. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment?

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