Risk-adjusted discount

ratesTabular

After a careful evaluation of investment alternatives and opportunities, Masters School Supplies has developed a CAPM-type relationship linking a risk index to the required return (RADR), as shown in the table

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. The firm is considering two mutually exclusive projects, A and B. Following are the data the firm has been able to gather about the projects.

	Project A	Project B
Initial investment (CF0)	$17,000	$29,000
Project life	8 years	8 years
Annual cash inflow (CF )	$6,200	$9,500
Risk index	0.4	1.2

All the firm's cash flows for each project have already been adjusted for taxes.

a. Evaluate the projects using risk-adjusted discount

rates.

b. Discuss your findings in part

(a),

and recommend the preferred project.

Question content area bottom

Part 1

a. The net present value for project A is

$enter your response here.

(Round to the nearest cent.)

Part 2

The net present value for project B is

$enter your response here.

(Round to the nearest cent.)

Part 3

b. Discuss your findings in part

(a),

and recommend the preferred project.(Select from the drop-down menus.)Project

B

A

is preferable to Project

A

B

, since the NPV of

A

B

is greater than the NPV of

B

A

Risk index

Required return (RADR)

0.0 7.4%

0.2. 8.3

0.4. 9.2

0.6. 10.1

0.8. 11.0

1.0. 11.9

1.2. 12.8

1.4. 13.7

1.6. 14.6

1.8. 15.5

2.0. 16.4

.