Chapter 12 Question 2 Adjusting for Risk: Docs R Us has performed a risk assessment of independent projects. They adjust for project risk by raising the calculated IRR by 3% for low risk projects, leaving the IRR the same for moderate risk projects, and lowering the calculated IRR by 2% for high risk projects. Project Cost NVP Risk IRR Risk Level ADJ IRR A $21,000 -$2,000 10% Low B $17,000 $4,000 14% Low C $15,000 $2,000 12% High D $14,000 $4,000 15% Average E $4,000 $1,000 11% High A. Without capital rationing, and given their cost of capital of 12%, and ignoring risk, based on IRR which projects should Meds R Us accept? Why? B. B. Without capital rationing, and given their cost of capital of 12%, and considering risk, which projects should Meds R Us accept? Why? Note that you will add 3% to the Project's IRR if it is low risk (making it look more favorable since it is), leave average risk Projects' IRRS the same, and subtract 2% from the IRR for high risk Projects (making them less favorable since they are due to the risk).
Chapter 12 Question 2 Adjusting for Risk: Docs R Us has performed a risk assessment of independent projects. They adjust for project risk by raising the calculated IRR by 3% for low risk projects, leaving the IRR the same for moderate risk projects, and lowering the calculated IRR by 2% for high risk projects. Project Cost NVP Risk IRR Risk Level ADJ IRR A $21,000 -$2,000 10% Low B $17,000 $4,000 14% Low C $15,000 $2,000 12% High D $14,000 $4,000 15% Average E $4,000 $1,000 11% High A. Without capital rationing, and given their cost of capital of 12%, and ignoring risk, based on IRR which projects should Meds R Us accept? Why? B. B. Without capital rationing, and given their cost of capital of 12%, and considering risk, which projects should Meds R Us accept? Why? Note that you will add 3% to the Project's IRR if it is low risk (making it look more favorable since it is), leave average risk Projects' IRRS the same, and subtract 2% from the IRR for high risk Projects (making them less favorable since they are due to the risk).
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Chapter 12
Question 2
Adjusting for Risk: Docs R Us has performed a risk assessment
of independent projects. They adjust for project risk by raising
the calculated IRR by 3% for low risk projects, leaving the IRR
the same for moderate risk projects, and lowering the calculated
IRR by 2% for high risk projects.
Project
Cost
NVP
Risk IRR
Risk Level
ADJ IRR
A
$21,000
-$2,000
10%
Low
B
$17,000 $4,000
14%
Low
C
$15,000 $2,000
12%
High
D
$14,000
$4,000
15%
Average
E
$4,000
$1,000
11%
High
A. Without capital rationing, and given their cost of capital of
12%, and ignoring risk, based on IRR which projects should
Meds R Us accept? Why?
B. B. Without capital rationing, and given their cost of capital of
12%, and considering risk, which projects should Meds R Us
accept? Why?
Note that you will add 3% to the Project's IRR if it is low risk
(making it look more favorable since it is), leave average risk
Projects' IRRS the same, and subtract 2% from the IRR for high
risk Projects (making them less favorable since they are due to
the risk).
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