The CFO of Bogey Golf has been given the following information about two mutually exclusive investments:

The CFO normally uses a risk-adjusted required rate of return to evaluate such investments. The firm's average required rate of return, which is 15 percent, is adjusted by 5 percent for high-risk projects, and it is adjusted by 3 percent for low-risk projects. Which project(s) should Bogey purchase?

Project X IRR = 14%. Risk Average

Project Y IRR = 19% Risk High

Answer

If Bogey's average required rate of return is 15%, the adjusted required rate of return for high-risk projects is 20% ( 15%+ 5%) and the required rate of return for the low-risk projects is 12%. The adjusted rate are the cost of raising capital. Therefore, given the above projects hurdle rates ( minimum required rate of return), Bojey should purchase Project X with an IRR of 14% compared to its cost of capital of 12% the project will be profitable. Project Y cost of capital is more than its IRR and therefore it does not meet the minimum required rate of return. Additionally, the projects are mutually exclusive this mean choosing project X eliminate further consideration of project Y. (Answered by Wellstuts)

I need help with how the required rate of return for low-risk projects is found, and how the cost of capital is 12%.