P11–28 Risk classes and RADR Moses Manufacturing is attempting to select the best of three mutually exclusive projects, X, Y, and Z. Although all the projects have 5-year lives, they possess differing degrees of risk. Project X is in class V, the highest-risk class;

project Y is in class II, the below-average-risk class; and project Z is in class III, the average-

risk class. The basic cash flow data for each project and the risk classes and riskadjusted discount rates (RADRs) used by the firm are shown in the following tables.

a. Find the risk-adjusted NPV for each project.

b. Which project, if any, would you recommend that the firm undertake?

Transcribed Image Text:

Project X Project Y Project Z Initial investment (CFO) -$180,000 -$235,000 -$310,000 Year (t) 1 Cash inflows (CF) $80,000 $50,000 $90,000 2345 70,000 60,000 90,000 3. 60,000 70,000 90,000 60,000 80,000 90,000 5 60,000 90,000 90,000 Risk Classes and RADRs Risk-adjusted Risk class Description discount rate (RADR) I Lowest risk 10% II Below-average risk 13 III Average risk 15 IV Above-average risk 19 V Highest risk 22