Mulliri Vjeter, an Albanian coffee shop chain, 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 1 to 5. The scale is re-created in the following table.

The company is analyzing two projects based on their RADRs. Project Arabica requires an initial investment of L2,000,000 (Lek or L is the currency of Albania) and is assigned a risk index of 2. Project Brasilia requires an initial investment of L1,500,000 and is assigned a risk index of 5. The two projects have 5-year lives. Arabica is expected to generate cash inflows of L850,000 each year, while project Brasilia is expected to generate L350,000 each year. Use each project’s RADR to select the best project.

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Risk index 1 2 2345 3 4 Required return 6% (current risk-free rate) 7% 8% (current IRR) 9% 10%