Risk-adjusted discount rateslong dash

BasicCountry Wallpapers is considering investing in one of three mutually exclusiveprojects, E,F, and G. Thefirm's cost ofcapital, r

r, is 14.6 %

14.6%, and therisk-free rate, Upper R Subscript Upper F

RF, is 10.3 %

10.3%. 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 thefirm's cost of capital. Which project is preferred in thissituation?

b. The firm uses the following equation to determine therisk-adjusted discountrate, RADR Subscript j

RADRj, for each project nbsp j

j:

RADR Subscript j equals Upper R Subscript Upper F plus RI Subscript j times left parenthesis r minus Upper R Subscript Upper F right parenthesis

RADRj=RF+RIjrRF

where Upper R Subscript Upper F

RF = risk-free rate ofreturn, RI Subscript j

RIj = risk index for project nbsp j

j, and r

r = cost of capital.

Substitute eachproject'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 thissituation?

d. Compare and discuss your findings in parts (a) and (c).Which project do you recommend that the firmaccept?

Project

E F G

Initial Investment (CF0) $15,700 $11,000 $19,900

Year Cash Flows

1 $6,200 $5,900 $3,700

2 6,200 3,900 5,800

3 6,200 4,500 7,700

4 6,200 1,900 11,700

Risk index (RI) 1.84 0.96 0.61

a. Find the net present value(NPV) of each project using thefirm's cost of capital.

The net present value for project E is $

. (Round to the nearestcent.)

The net present value for project F is $

. (Round to the nearestcent.)

The net present value for project G is $

. (Round to the nearestcent.)

Which project is preferred in thissituation?(Select from thedrop-down menu.)

Project

G

F

E

, with the highestNPV, is preferred.

b. The firm uses the following equation to determine therisk-adjusted discountrate, RADR Subscript j

RADRj, for each project nbsp j

j:

RADR Subscript j equals Upper R Subscript Upper F plus RI Subscript j times left parenthesis r minus Upper R Subscript Upper F right parenthesis

RADRj=RF+RIjrRF

where Upper R Subscript Upper F

RF = risk-free rate ofreturn, RI Subscript j

RIj = risk index for project nbsp j

j, and r

r = cost of capital.

The RADR for project E is

%. (Round to two decimalplaces.)

The RADR for project F is

%. (Round to two decimalplaces.)

The RADR for project G is

%. (Round to two decimalplaces.)

c. Use the RADR for each project to determine its risk-adjusted NPV.

The risk-adjusted net present value for project E is $

. (Round to the nearestcent.)

The risk-adjusted net present value for project F is $

. (Round to the nearestcent.)

The risk-adjusted net present value for project G is $

. (Round to the nearestcent.)

Which project is preferable in thissituation? (Select from thedrop-down menu.)

Project

E

G

F

will be preferable.

d. Compare and discuss your findings in parts (a) and (c).Which project do you recommend that the firmaccept? (Select from thedrop-down menu.)

After adjusting the discountrate, even though all projects are stillacceptable, the ranking changes. Project

E

G

F

has the highest risk-adjusted NPV and should be chosen.