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P12-12-Risk classes and RADR Moses Manufacturing is attempting to select the best of three mutually exclusive projects, X, Y, and Z. Although all the projects have 5-year lives, they possess different degrees of risk. Project X is class V, the highest risk class; project Y is II, the below average risk class; and project Z is class III, the average risk class. The basic cash flow data for each project and risk class and risk adjustment discount rates (RADRs) used by the firm are shown in the following tables.

Project X Project Y Project Z

Initial investment (CFg) -$180,000 -$235,000 -$310,000

Year (t) Cash inflows (CFt)

1 $80,000 $50,000 $90,000

2 $70,000 $60,000 $90,000

3 60,000 70,000 90,000

4 60,000 80,000 90,000

5 60,000 90,000 90,000

Risk Classes and RADRs

Risk class Descriptions Risk-adjusted discount rate (RADR)

I Lowest risk 10%

II Below-average risk 13

III Average risk 15

IV Above average risk 19

V Highest risk 22

a) Find the risk adjusted NPV for each project.

b) Which project if any, would you recommend that the firm undertake?