P11-24 (similar to)

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Risk-adjusted discount

rateslong dashBasic Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm's cost of capital, rr ,is 15.4 %15.4%, and the risk-free rate, Upper R Subscript Upper FRF, is 10.3 %10.3%. The firm has gathered the following basic cash flow and risk index data for each project LOADING...

.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 rate, RADR Subscript jRADRj, for each project nbsp j j :RADR Subscript j equals Upper R Subscript Upper F plus RI Subscript j times left parenthesis r minus Upper R Subscript Upper F right parenthesisRADRj=RF+RIjrRF where Upper R Subscript Upper FRF= risk-free rate of return, RI Subscript jRIj = risk index for project nbsp j j , and rr = 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 present value (NPV) of each project using the firm's cost of capital.

Project (nbsp j j )
	E	F	G
Initial investment (CF 0CF0)	$15 comma 10015,100	$11 comma 00011,000	$18 comma 30018,300
Year (tt )	Cash inflows (CF Subscript tCFt)
1	5,600	5,600	$3,700
2	5,600	4,500	5,700
3	5,600	4,500	7,900
4	5,600	1,600	12,800
Risk index (RI Subscript jRIj)	1.79	1.03	0.61