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Risk - adjusted discount rates: Basic Country Wallpapers is considering investing in one of three mutually exclusive projects, E , F , and G .
Riskadjusted discount rates: BasicCountry Wallpapers is considering investing in one of three mutually exclusive projects, E F and G The firm's cost of capital, r Subscript m Baseline is and the riskfree rate, Upper R Subscript Upper F is The firm has gathered the following basic cash flow and risk index data for each project see table.
a Find the net present valueNPV 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 riskadjusted discount rate, RADR Subscript j for each project nbsp j:
RADR Subscript j equals Upper R Subscript Upper F plus beta Subscript j times left parenthesis r Subscript m Baseline minus Upper R Subscript Upper F right parenthesis
where Upper R Subscript Upper F riskfree rate of return, beta Subscript j beta of project nbsp j and r Subscript m Baseline expected return on market portfolio
Substitute each project's beta into this equation to determine its RADR.
c Use the RADR for each project to determine its riskadjusted NPV Which project is preferable in this situation?
d Compare and discuss your findings in parts a and cWhich project do you recommend that the firm accept?Data table
Click on the icon here in order to copy the contents of the data table below into
a spreadsheet.
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