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P12-8-Risk adjustment discount rates; Basic Country Wallpaper is considering investing in one of three mutually exclusive projects, E, F, and G. The firms cost of capital, r is 15%, and the risk free rate is R, is10%. The firm has gathered the basic cash flow and risk index data for each project as shown in the following table.

Projects r

E F G

Initial investment (CFo) -$15,000 -$11,000 -$19,000

Cash inflows (CFt)

Years (t)

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 (R1t) 1.8 1.00 0.60

a). Find the net present value (NPV) of each project using the firms cost of capital.

Which project is preferred in this situation?

b). The used the following equation ton determine the risk-adjusted discount rate RADR, for each project j:

RADR j= Rf + [ RIj x (r