Question
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)
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 11.7%, 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 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) $65,000 $75,000 Year (t ) Cash inflows (CFt) 1 $29,000 $27,000 2 29,000 29,000 3 29,000 41,000 4 29,000 43,000 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 1.16 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. a. The risk-adjusted discount rate for project X will be nothing%. (Round to two decimal places.)
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