ST11–2 Risk-adjusted discount rates CBA Company is considering two mutually exclusive projects, A and B. The following table shows the CAPM-type relationship between a risk index and the required return (RADR) applicable to CBA Company.

Project data are as follows:

a. Ignoring any differences in risk and assuming that the firm’s cost of capital is 10%, calculate the net present value (NPV) of each project.

b. Use NPV to evaluate the projects, using risk-adjusted discount rates (RADRs) to account for risk.

c. Compare, contrast, and explain your findings in parts a and b.

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Risk index 0.0 Required return (RADR) 7.0% (risk-free rate, Rp) 0.2 8.0 0.4 9.0 0.6 10.0 0.8 11.0 1.0 12.0 1.2 13.0 1.4 14.0 1.6. 15.0 1.8 16.0 2.0 17.0