Centennial Catering Inc. (CCI) is considering two mutually exclusive investments. It wishes to

use two different evaluation methods Certainty Equivalents (CE) and Risk-adjusted rate of

return (RADR - CAPM) model. The cost of capital for CCI is 12% and the current risk-free rate

is 7%. Cashflows associated with the two projects are as follows.

Project A Project B

Investment Cost $70,000 $78,000

Years (t) Cash Flow (CTt)

1 $30,000 $22,000

2 $30,000 $32,000

3 $30,000 $38,000

4 $30,000 $46,000

A )Use the Certainty Equivalent approach to calculate the Net Present Value of the projects

given the following CE factors

Year Project A Project B

1 0.85 0.95

2 0.95 0.90

3 0.95 0.80

4. 0.95 0.80

B) Using the risk-adjustment rate of return approach to calculate the NPV of each project given that Project A has a risk index (R1) 0f. 1.20 and Project B has a risk index of 1.40. Use the following equation to calculate the required project return for each

Kj=Rf + {R1 x (Ka - Rf)}

C) Explain they the results of the two approaches may differ from one another. Which project would you choose and why?