Risk-adjusted rates of return using CAPMCentennial 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

11.8%,

and they observe that the current risk-free rate of return is

6.6%.

Cash flows associated with the two projects are shown in the following table.(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)

	Project X	Project Y
Initial investment (CF0)	$74,000	$84,000
Year (t )	Cash inflows (CFt)
1	$32,000	$26,000
2	32,000	31,000
3	32,000	36,000
4	32,000	42,000

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

1.41.

The RADR factors are similar to project betas.

(Hint:

Use the following equation to calculate the required project return for each:

r=RF+brmRF.)

b. Discuss your findings in part

(a),

and recommend the preferred project.

Question content area bottom

Part 1

a. The risk-adjusted discount rate for project X will be

enter your response here%.

(Round to two decimal places.)

Part 2

The risk-adjusted discount rate for project Y will be

enter your response here%.

(Round to two decimal places.)

Part 3

The net present value for project X is

$enter your response here.

(Round to the nearest cent.)

Part 4

The net present value for project Y is

$enter your response here.

(Round to the nearest cent.)

Part 5

b. Discuss your findings in part

(a),

and recommend the preferred project. (Select from the drop-down menus.)The RADR approach prefers project

X

Y

over project

Y

X

. The RADR approach combines the risk adjustment and the time adjustment in a single value. The RADR approach is most often used in business.