P12-12 (similar to) Risk-adjusted rates of return using CAPMCentennial 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 12.1 % , and they observe that the current risk-free rate of return is 6.9 % . Cash flows associated with the two projects are shown in the following table.

Project X Project Y

Initial investment (CF 0 ) $67,000 $75,000

Year (t ) Cash inflows (CF Subscript t )

1 $26,000 $21,000

2 26,000 30,000

3 26,000 42,000

4 26,000 46,000

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 1.17 and project Y has an RADR factor of 1.38 . The RADR factors are similar to project betas.

b. Discuss your findings in part (a), and recommend the preferred project. a. The risk-adjusted discount rate for project X will be nothing %. (Round to two decimal places.)