Sheila Goodman recently received her MBA from the HarvardBusiness School. She has joined the family business, GoodmanSoftware Products Inc., as Vice-President of Finance. She believesin adjusting projects for risk. Her father is somewhat skepticalbut agrees to go along with her. Her approach is somewhat differentthan the risk-adjusted discount rate approach, but achieves thesame objective. She suggests that the inflows for each year of aproject be adjusted downward for lack of certainty and then bediscounted back at a risk-free rate. The theory is that theadjustment penalty makes the inflows the equivalent of risklessinflows, and therefore a risk-free rate is justified.

A table showing the possible coefficient of variation for aninflow and the associated adjustment factor is shown next:
  

Coefficient of Variation			Adjustment Factor
0	?	.25		.90
.26	?	.50		.80
.51	?	.75		.70
.76	?	1.00		.60
1.01	?	1.25		.50

Assume a $125,000 project provides the following inflows with theassociated coefficients of variation for each year.
  

Year	Inflow		Coefficient of Variation
1	$	38,700			.15
2		51,200			.23
3		78,200			.48
4		58,900			.75
5		66,500			1.05

  
Use Appendix B for an approximate answer but calculate your finalanswer using the formula and financial calculator methods.

a. Fill in the table below: (Do not roundintermediate calculations. Round your dollar answers to the nearestwhole dollar.)

Year Adjustment Factor Adjusted Inflow

1

2

3

4

5

  
b-1. If the risk-free rate is 6 percent, computethe net present value of the adjusted inflows. (Negativeamount should be indicated by a minus sign. Do notround intermediate calculations and round your answer to 2 decimalplaces.)
  

  
b-2. Should this project be accepted?
  

	No
	Yes