2D2G IRONSIDE PRODUCTS IS CONSIDERING TWO INDEPENDENT PROJECTS, EACH...
320.
CSO: 2D2a
LOS: 2D2g
Ironside Products is considering two independent projects, each requiring a cash outlay of
$500,000 and having an expected life of 10 years. The forecasted annual net cash
inflows for each project and the probability distributions for these cash inflows are as
follows.
Project R
Project S
Probabilities
Cash Inflows
Probabilities
Cash Inflows
0.10
$ 75,000
0.25
$ 70,000
0.80
95,000
0.50
110,000
0.10
115,000
0.25
150,000
Ironside has decided that the project with the greatest relative risk should meet a hurdle
rate of 16% and the project with less risk should meet a hurdle rate of 12%. Given these
parameters, which of the following actions should be recommended for Ironside to
undertake?
a.
Reject both projects.
b.
Accept Project R and reject Project S.
c.
Reject Project R and accept Project S.
d.
Accept both projects.