isk-adjusted discount

rateslong dashTabular

After a careful evaluation of investment alternatives and opportunities, Masters School Supplies has developed a CAPM-type relationship linking a risk index to the required return (RADR), as shown in the table

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. The firm is considering two mutually exclusive projects, A and B. Following are the data the firm has been able to gather about the projects.

	Project A	Project B
Initial investment (CF 0CF0)	$ 20 comma 000$20,000	$ 31 comma 000$31,000
Project life	66 years	66 years
Annual cash inflow (CF nbspCF )	$ 7 comma 400$7,400	$ 10 comma 600$10,600
Risk index	0.20.2	1.41.4

All the firm's cash flows for each project have already been adjusted for taxes.

a. Evaluate the projects using risk-adjusted discount

rates.

b. Discuss your findings in part

(a),

and recommend the preferred project.

Risk index	Required return (RADR)
0.0	7.2 %7.2% (risk-free rate, Upper R Subscript Upper FRF)
0.2	8.08.0
0.4	8.88.8
0.6	9.69.6
0.8	10.410.4
1.0	11.211.2
1.2	12.012.0
1.4	12.812.8
1.6	13.613.6
1.8	14.414.4
2.0	15.2