P12-9 (similar to)

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Risk-adjusted discount ratesBasicCountry Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm's cost of capital, r , is 14.9%, and the risk-free rate, RF, is 10.2%. 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, RADRj, for each project j : RADRj=RF+RIjrRF where RF = risk-free rate of return, RIj = risk index for project j , and r = 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. Press Continue to see more.

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Data 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.)

	Project ( j )
	E	F	G
Initial investment (CF0)	$14,200	$11,000	$18,500
Year (t )	Cash inflows (CFt)
1	$6,400	$6,100	$3,800
2	6,400	4,400	6,000
3	6,400	4,800	8,700
4	6,400	1,900	11,000
Risk index (RIj)	1.76	1.04	0.63

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