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Risk-adjusted rates of return using CAPM Centennial Catering, Inc., is considering two mutually exclusive investments. The company wishes to use a CAPM-type risk-adjusted discount rate
Risk-adjusted rates of return using CAPM Centennial Catering, Inc., is considering two mutually exclusive investments. The company wishes to use a CAPM-type risk-adjusted discount rate (RADR) in its analysis. Centennial's managers believe that the appropriate market rate of return is 12.1%, and they observe that the current risk-free rate of return is 6.5%. Cash flows associated with the two projects are shown in the following table. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Initial investment (CF) Year (t) 1 Project X Project Y $67,000 $77,000 Cash inflows (CF) $26,000 $17,000 26,000 29,000 26,000 38,000 26,000 51,000 2 3 4 a. Use a risk-adjusted discount rate approach to calculate the net present value of each project, given that project X has an RADR factor of 1.24 and project Y has an RADR factor of 1.42. The RADR factors are similar to project betas. (Hint: Use the following equation to calculate the required project return for each: r=Rp+bx ('m-RF) .) b. Discuss your findings in part (a), and recommend the preferred project. a. The risk-adjusted discount rate for project X will be %. (Round to two decimal places.) The risk-adjusted discount rate for project Y will be [%. (Round to two decimal places.) The net present value for project X is $ (Round to the nearest cent.) The net present value for project Y is $ (Round to the nearest cent.) b. Discuss your findings in part (a), and recommend the preferred project. (Select from the drop-down menus.) The RADR approach prefers project over project The RADR approach combines the risk adjustment and the time adjustment in a single value. The RADR approach is most often used in business
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