8 RADR and Risk Classes. Andover Industrial Products is considering in which of the following three, mutually exclusive, projects it should invest. All projects have equal lives but differ in risk. Project 1 is a straightforward replacement project and is viewed as low risk. Project 2 involves an expansion of existing operations and is considered to be of average risk. Project 3 is a plan to expand into a new business area and is viewed as high risk.

The expected project cash flows are presented below:

Project 1 £ Project 2 £ Project 3 £
Initial outlay 200,000 300,000 400,000 Cash inflows Year 1 70,000 90,000 115,000 2 60,000 65,000 115,000 3 50,000 75,000 115,000 4 50,000 75,000 115,000 5 30,000 100,000 115,000 The required rates of return for each risk class are as follows:
Risk class Required rate of return Low risk projects 8%
Average risk projects 10%
High risk projects 15%

(a) calculate the risk-adjusted NPV for each project;

(b) based on your findings in (a), which project, if any, should be accepted.