Country Wallpapers is considering investigating in one of three mutually exclusive projects, E, F, and G. The firms cost of capital, r, is 15%, and the risk-free rate, Rf, is 10%. The firm has gathered the basic cash flow and risk index for each project as shown in the following table.

Project (j)

E F G

Initial Investment (CF0) -15,000 -11,000 -19,000

Year Cash Flows

1 6,000 6,000 4,000

2 6,000 4,000 6,000

3 6,000 5,000 8,000

4 6,000 2,000 12,000

Risk Index (RIj) 1.8 1.00 0.60

a. Find the nest present value (NVP) of each project, using the firm's cost of capital. Which project is preferred in this situation?

b. The firm uses the following equation to determine the risk-adjusted discount rate, RADRj, for each project j:

RADRj = RF + [RIj x (r - RF)]

where

RF = risk-free rate of return

RIj = risk index for project j

r = cost of capital

Substitute each projects risk index into this equation to determine its RADR.

c. Use RADR for each projects to determine its risk-adjusted NVP. Which project is preferable in this situation?

d. Compare and discuss your findings in parts a and c. Which project do you recommend the firm accept?