Like most firms in its industry, Yeastime Bakeries uses a subjective risk assessment tool of its own

Question:

Like most firms in its industry, Yeastime Bakeries uses a subjective risk assessment tool of its own design. The tool is a simple index by which projects are ranked by level of perceived risk on a scale of 0–10. The scale is recreated in the following table.

Required retwn Risk index . 4.0% (current risk-free rate) .. .. 4.5 1... 2 .. .. 5.0 3 ... .. 5.5 ... 6.0 4... 6.5 (curr

The firm is analyzing two projects based on their RADRs. Project Sourdough requires an initial investment of $12,500 and is assigned a risk index of 6. Project Greek Salad requires an initial investment of $7,500 and is assigned a risk index of 8. The two projects have 7-year lives. Sourdough is projected to generate cash inflows of $5,500 per year. Greek Salad is projected to generate cash inflows of $4,000 per year. Use each project’s RADR to select the better project.