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wrote...
Posts: 2725
A year ago
KLE Holdings is considering a capital budgeting project with a life of 7 years that requires an initial outlay of $277,400. The probability distribution for annual incremental cash flows is as follows:

ProbabilityIncremental Free Cash Flow
4%-$15,000
16%    18,000
55%    65,000
25%    99,000

a.The risk-adjusted required rate of return for this project is 12%. Calculate the risk-adjusted net present value of the project and the project's IRR.
b.Should the project be accepted?
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wrote...
Top Poster
Posts: 1291
A year ago
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a.Expected annual cash flow
= (.04  -$15,000) + (.16  $18,000) + (.55  $65,000) + (.25  $99,000)
= $62,780

Risk adjusted NPV = $9,112.64; IRR =13.03%

b.Accept because NPV is positive and IRR exceeds the risk adjusted required return.
 
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wrote...
A year ago
Why did I have such a hard time with this?!? Thanks for clarifying
wrote...
A year ago
We all run into troubles, don't worry
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