Risk classes and RADR Moses Manufacturing is attempting to select the best of three mutually exclusive projects, X, Y, and Z. Although all the projects have

5

-year

lives, they possess differing degrees of risk. Project X is in class V, the highest-risk class; project Y is in class II, the below-average-risk class; and project Z is in class III, the average-risk class. The basic cash flow data for each project and the risk classes and risk-adjusted discount rates (RADRs) used by the firm are shown in the following tables

	Project X	Project Y	Project Z
Initial Investment (CF0)	177000	237000	311000
Year (t)		Cash inflows
1	81000	59000	95000
2	70000	70000	95000
3	62000	78000	95000
4	63000	81000	95000
5	65000	99000	95000

Risk Classes and RADRs
Risk Class	Description	Risk adjusted discount rate (RADR)
I	Lowest risk	10.4 %

II	Below-average risk	13.3
III	Average risk	15.1
IV	Above-average risk	19.2
V	Highest risk	22.1

a. Find the risk-adjusted NPV for each project.

b. Which project, if any, would you recommend that the firm undertake?