Global Resources Case 20
Risk-Adjusted Discount Rates
Purpose: The case covers the process of adjusting the discount rate to account for the risk in a project.
It clearly demonstrates that the risk-adjusted discount rate approach can affect (and change) the ranking
of investments. It further brings an international dimension into the decision making process and
encourages the student to address the issue of whether international investments increase risk because
of uncertainty or decrease risk because of diversification. The concept of mutually exclusive
investments is also incorporated in the case.
Relation to Text: The case should follow Chapter 13.
Complexity: The case is moderately complex and should require one hour.
Solutions
1. Investment A
($200,000 investment)
PV Factor
Year Inflows 10% PV of Inflows
1 $ 40,000 x .909 = $ 36,360
2 60,000 .826 49,560
Investment B
($200,000 investment)
PV Factor
Year Inflows 10% PV of Inflows
1 $ 50,000 x .909 = $ 45,450
2 20,000 .826 16,520
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Project B is superior. ($146,955 vs. $122,410).
2. Investment A
($200,000 investment)
PV Factor
Year Inflows 13% PV of Inflows
1 $ 40,000 x .885 = $ 35,400
2 60,000 .783 46,980
3. Investment B
($200,000 investment)
PV Factor
Year Inflows 17% PV of Inflows
1 $ 50,000 x .855 = $ 42,750
2 20,000 .731 14,620
3 100,000 .624 62,400
6. With non-mutually exclusive investments and no capital rationing, any projects with positive net
7. Tai Ming introduces a classic debate in international financial management. Although international
investments are generally riskier than domestic investments, they do provide important international
The authors are of the opinion that the impact of international diversification is more important than
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.