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Risk-adjusted discount rates-- Basic Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm's cost of capital, r, is 14.8%, and the risk-free rate, Rais 9.8%. The firm has gathered the following basic cash flow and risk index data for each project a. Find the net present value (NPV) 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 rato, RADR, for each project RADR-RE+ RI,* (-R) whero R = risk-free rate of return, RI, -risk index for project ), and r cost of capital. Substitute each project's risk index into this equation to determine its RADR c. Use the RADR for each project to determine its risk-adjusted NPV. Which project is preferable in this situation? d. Compare and discuss your findings in parts (a) and (c). Which project do you recommend that the firm accept? a. Find the net prese - X Data table The net present valul The not present valu The net present valu Which project is pret Project 7. with the (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Project (1) E F G Initial investment (CF) $14,100 $11,000 $18,100 Year () Cash inflows (CF) 1 $6,200 $6,400 $3,600 2 6,200 4,200 6,200 4,500 8,700 6,200 1,900 12,400 Risk index (RI) 1.78 1.03 0.56 b. The firm uses the 5,000 3 RADR-R+R where Re-risk-free 4 The RADR for projed The RADR for projed The RADR for projed Print Done a. Find the net present value (NPV) of each project using the firm's cost of capital The net present value for project Eis $(Round to the nearest cent.) The net present value for project F is $. (Round to the nearest cent) The not present value for project is $. (Round to the nearest cent.) Which project is preferred in this situation? (Select from the drop-down menu.) Project with the highest NPV, is preferred b. The firm uses the following equation to determine the risk-adjusted discount rate, RADR, for each project: RADR, = R + RI* (r-R) where Rx -risk-free rate of return, RI - risk index for project ). and r = cost of capital The RADR for project is %. (Round to two decimal places.) The RADR for project F is %. (Round to two decimal places.) The RADR for project G is % (Round to two decimal places.) c. Use the RADR for each project to determine its risk-adjusted NPV, The risk-adjusted net present value for project Els $ (Round to the nearest cont.) The risk-adjusted net present value for project Fis $ (Round to the nearest cont.) The risk-adjusted net present value for project G is $| (Round to the nearest cent.) Which project is preferable in this situation? (Select from the drop-down menu.) Project will be preferable. The net present value for project Gis (Round to the nearest cont.) Which project is preferred in this situation? (Select from the drop-down menu) Project with the highest NPV is preferred b. The firm uses the following equation to determine the risk-adjusted discount rato, RADR, for each project RADR-RE+ RI* (-R) where Re-risk-free rate of return RI risk index for project and cost of capital The RADR for project Els % (Round to two decimal places.) The RADR for project Fis % (Round to two decimal places) The RADR for project is % (Round to two decimal places) c. Use the RADR for each project to determine is nisk-adjusted NPV. The nisk-adjusted not present value for p poct Eis (Round to the nearest cont> The risk-adjusted not present value for project Fis $(Round to the nearest cont.) The nisk-adjusted net present value for project G $(Round to the marout cont) Which project is preferable in this situation? (Select from the drop-down menu) Project will be preferable d. Compare and discuss your findings in parts (a) and (c) Which project do you recommend that the firm accept? (Select from the drop-down menu) After adjusting the discount rato, even though all projects are still acceptable, the ranking changes. Project has the highest risk-adjusted NPV and should be chosen
