Mayflower Interiors is evaluating three mutually exclusive projects. The cost of capital, r, is 13.5% and the risk-free rate, RF, is 10%. The following information is available regarding the three mutually exclusive projects.

a. Calculate the net present value (NPV) of each project using the firm’s cost of capital. Based on your answer, which project should be accepted?
b. Mayflower Interiors prefers to use the risk-adjusted discount rate instead of the firm’s cost of capital. Calculate the risk-adjusted discount rate for each of the three projects using the RADR_j equation below:

where
R_F = risk-free rate of return
RI_j = risk index for project j
r = cost of capital
c. Calculate the net present value (NPV) of each project using the risk-adjusted discount rate. Based on your answer, which project should be accepted?
d. Based on your answers in parts a and c, which project should be accepted? Explain your recommendation.

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Initial investment (CF) Year (t) 1 2 3 4 Risk index (RI;) Project (j) Project Y $13,000 Cash inflows (CF,) $ 6,500 4,500 5,200 2,200 1.0 Project X $16,500 $ 5,500 5,500 5,500 5,500 1.7 Project Z $21,000 $ 5,000 6,500 7,500 11,500 0.4