Question
Moses Manufacturing is attempting to select the best of three mutually exclusive projects, X, Y, and Z. Although all the projects have 5-year lives, they
Moses Manufacturing is attempting to select the best of three mutually exclusive projects, X, Y, and Z. Although all the projects have 5-year lives, they possess differing degrees of risk. Project X is in class V, the highest-risk class; project Y is in class II, the below-average-risk class; and project Z is in class III, the average-risk class. The basic cash flow data for each project and the risk classes and risk-adjusted discount rates (RADRs) used by the firm are shown in the following tables
a. Find the risk-adjusted NPV for each project.
b. Which project, if any, would you recommend that the firm undertake?
(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)
| Project X | Project Y | Project Z |
| |
| Initial investment (CF 0CF0) | $182 comma 000182,000 | $236 comma 000236,000 | $311 comma 000311,000 | |
| Year (tt ) | Cash inflows (CF Subscript tCFt) | |||
| 1 | 80,000 | 59,000 | 86,000 | |
| 2 | 67,000 | 60,000 | 86,000 | |
| 3 | 62,000 | 80,000 | 83,000 | |
| 4 | 63,000 | 81,000 | 86,000 | |
| 5 | 57,000 | 92,000 | 86,000 | |
| Risk Classes and RADRs | ||
| Risk Class | Description | Risk adjusted discount rate (RADR) |
| I | Lowest risk | 10.6% |
| II | Below-average risk | 13.5 |
| III | Average risk | 15.6 |
| IV | Above-average risk | 19.4 |
| V | Highest risk | 22.3 |
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