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P12-12 (similar to) Risk-adjusted rates of return using CAPM Centennial Catering, Inc., is considering two mutually exclusive investments. The company wishes to use a CAPM-type
P12-12 (similar to) Risk-adjusted rates of return using CAPM Centennial Catering, Inc., is considering two mutually exclusive investments. The company wishes to use a CAPM-type risk-adjusted discount rate (RADR) in its analysis. Centennial's managers believe that the appropriate market rate of return is 12.2%, and they observe that the current risk-free rate of return is 6.9%. Cash flows associated with the two projects are show the following table. (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Initial investment (CF) Year (t) Project Project Y $68,000 $78,000 Cash inflows (CF) $25,000 $25,000 25,000 28,000 Tear () Lasni MITOWS urt $25,000 $25,000 25,000 28,000 25,000 39,000 25,000 42,000 a. Use a risk-adjusted discount rate approach to calculate the net present value of each project, given that project X has an RADR factor of 1.18 and project Y has an RADR factor of 1.37. The RADR factors are similar to project betas. (Hint: Use the following equation to calculate the required project return for each: r=Rp+bx (rm-RF).) b. Discuss your findings in part (a), and recommend the preferred project. a. The risk-adjusted discount rate for project X will be %. (Round to two decimal places.)
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