Aa Aa The risk-adjusted discount rate approach is based on the concept that different projects have different risk profiles. Based on a project's nsk profile, the rate of return used to discount the expected cash flows from the project is adjusted to accommodate project risk. If you estimate that aproject has lower risk than the average risk of other projects in the company, You would use a as the discount rate in the project's net present value evaluation. Consider the case of Serious cybermatic Corporation: The company is owned 100% by private shareholders and carries no debt on its books The company's beta is estimated to be 1.0. The company uses a risk-free rate of 10%, and the market expects a return of 14%. The graph plots the security market line (sML). Based on your understanding of the capital asset pricing model and the risk-adjusted discount rate toward project the following on use point A (orange square) to show the rate of return the company should require on a project with average risk use point B (green triangle) to show the rate of returm the company should require on a project with a beta of 1.8. Tool tip: Mouse over the points on the graph to see their coordinates. REQUIRED RATE OF RETURN (Percent 10 0.0 0.2 04 06 08 D 1.2 14 1.6 18 20 PROJECT BETA Suppose the company is analyzing a project that requires a net investment of $10.0 milion. The project looks very promising and is forecasted to generate annual net cash flows $30.0 million each year for the next five years. of If the project is considered to be of average risk, its NPv would be If the project is considered to have a higher risk than the average risk of projects in the company, and it has a beta of 1.8, the project's NPV would be Grade It Now Save & Continue