The Biotek Corporation has a basic cost of capital of 15 percent and is considering investing in either or both of the following projects. Project HiTek will require an investment of $453,000, while Project LoTek’s investment will be $276,000.. The following after-tax cash flows are estimated for each project.
HITEK LOTEK 0 $-453,000 $-276,000 1 132,000 74,000 2 169,500 83,400 3 193,000 121,000 4 150,700 54,900 5 102,000 101,000 6 0 29,500 7 0 18,000
a) Determine the present value of the cash inflows for each project and then calculate their net present values by subtracting the appropriate dollar amount of capital investment. Which if either of the projects is acceptable?
b) B. Calculate the internal rates of return for Project HiTek and Project Lotek. Which project would be preferred?
c) Now assume that BioTek uses risk-adjusted discount rates to adjust for differences in risk among different investment opportunities. Biotek projects are discounted at the firm’s cost of capital of 15 percent. A risk premium of 3 percentage points is assigned to Lotek-type projects, while a 6 percentage point risk premium is used for project similar to Hitek. Determine the risk-adjusted present value of the c cash inflow for LoTek and Hitek and calculate their risk-adjusted net present values,. Should BioTek invest in either, both or neither project?