Integrative Learning Ru
ic, Definiti...
Capital Budgeting Decisions
A college intern working at Anderson Paints evaluated potential investments using the firm’s average required rate of return (r) as the discount rate in the evaluation process
and he produced the following report for you as the capital budgeting manager at Anderson Paints:
Project NPV IRR Risk
LOM $1, XXXXXXXXXX% High
QUE XXXXXXXXXXLow
YUP XXXXXXXXXXAverage
DOG XXXXXXXXXXLow
As the capital investment manager you must account for the risks associated with capital budgeting projects before making final recommendations and decisions. The
company’s capital investment risk management policy calls for an adjustment of the firm’s average required rate of return by plus/minus 2% if a project’s risk deviates from the
firm’s average risk classification. The table above shows the estimated profitability of each project using the average required rate of return of the company and disregarding any
deviation of each project’s risk from the firm’s average.
Your job as the capital investment manager is to account for differences in risk in each project according to company’s policy and to make recommendations regarding the
acceptability or non-acceptability of each potential investment as part of the upcoming proposed firm’s capital budget. First, explain how you would adjust each project’s required
ate of return for risk using the risk management policy of the company and discuss the appropriateness of the firm’s risk management policy. Second, insert a column in the table
above showing the appropriate risk-adjusted required rate of return or discount rate for each project. Third, explain which of the projects listed above you would recommend and
why for the upcoming firm’s capital investment budget.
Case Ru
ic
Capstone
4
Milestones
3 2
Benchmark
1
Understanding of Problem or
Issue
Presents accurate and detailed de-
scription of the problem or issue
central to the case
With minor exceptions, identifies
and outlines the principal problem
or issue in the case;
Partially recognizes the problem
or issue of the case; displays some
understanding of the problem or
issue
Does not recognize the problem or
issue of the case; displays little
understanding of the problem or
issue.
Connections to Financial Con-
cepts and Theory
Presents accurate and detailed
connections between the problem
or issue and relevant financial
concepts and theory
With minor exceptions, identifies
and outlines connections between
the problem or issue and relevant
financial concepts and theory
Makes some or weak connection
etween the problem or issue and
elevant financial concepts and
theory
Makes no connection between the
problem or issue and relevant fi-
nancial concepts and theory
Analysis and Evaluation Presents an in-depth and critical
assessment of the facts and tasks
equired by the case
With minor exceptions, provides
factual analysis of the case and
performs all of the required case
tasks using the information pro-
vided in the case
Provides some factual analysis of
the case and performs some of the
equired case tasks using the in-
formation provided in the case
Simply repeats facts identified in
the case and fails to perform re-
quired case tasks supported by the
information provided in the case
Action Plans Effectively weighs and assesses
the information provided in the
case by thoroughly outlining a set
of recommendations to deal with
the problem or issue in the case
With minor exceptions, outlines
and summarizes appropriate rec-
ommendations to deal with the
problem or issue; the proposed
ecommendations are based on the
information provided in the case
Outlines and summarizes some
ecommendations for action to
deal with the problem or issue; in
most instances, recommendations
are based on the information pro-
vided in the case
Does not provide appropriate rec-
ommendations for action or rec-
ommendations do not address the
key problem or issue