Question
Risk classes and RADR Moses Manufacturing is attempting to select the best of three mutually exclusiveprojects, X,Y, and Z. Although all the projects 5-year lives,
Risk classes and RADR Moses Manufacturing is attempting to select the best of three mutually exclusiveprojects, X,Y, and Z. Although all the projects
5-year lives, they possess differing degrees of risk. Project X is in classV, thehighest-risk class; project Y is in classII, thebelow-average-risk class; and project Z is in classIII, theaverage-risk class. The basic cash flow data for each project and the risk classes andrisk-adjusted discount rates(RADRs) used by the firm.
.
a. Find the risk-adjusted NPV for each project.
b. Whichproject, ifany, would you recommend that the firmundertake?
Table Info:
Project X
Project Y
Project Z
Initial investment (CF 0)
181,000
235,000
307,000
Year (t)
Cash inflows (CF Subscript CFt)
1
84,000
60,000
85,000
2
68,000
67,000
85,000
3
58,000
77,000
85,000
4
56,000
87,000
85,000
5
60,000
93,000
85,000
Risk Classes and RADRs
Risk Class
Description
Risk adjusted discount rate(RADR)
I
Lowest risk
10.9 %
II
Below-average risk
14.0
III
Average risk
15.9
IV
Above-average risk
19.8
V
Highest risk
22.9
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Introduction to Finance Markets Investments and Financial Management
Authors: Melicher Ronald, Norton Edgar
15th edition
9781118800720, 1118492676, 1118800729, 978-1118492673
