Considering two mutually exclusive projects & using a risk adjusted rate (RADR) to help make decision.

We know:

Cost of capital (call this the market return (Rm) in CAPM) is 12%

Risk free rate (Rf) is 7%

Cash flows for each projects:

Project One Project Two

Initial investment $70,000$78,000

InflowsYear 1$30,000$22,000

Year 2$30,000$32,000

Year 3$30,000$38,000

Year 4$30,000$46,000

Risk factor (b) 1.2 1.4

1) Use a risk adjusted interest rate (RADR) to calculate the NPV of each project

2) Which project will you go forward with?