Risk adjusted discount rate:Basic

118-9 Rick Adjusted discount Fares Basic Country Wallpapers is considering investing in Ohfir of three mortality exchive projects, E. F. and G. The firm's cost of capital, ro ja 15% and the rick free rate. Roy is 10%. The firm has gathered the basic cash flow and risk index data for each project as shown in the following table. Project (/) E F G - $15,000 -$11,000 -$19,00 Initial investment (CF) Cash inflows (CF,) Year in $6.000 $6,000 $ 4,000 6.000 4,000 6,000 6,000 5,000 8,000 6,000 2,000 12,000 Risk index (RI) 1.80 1.00 0.60 a. Find the net present value (NPV) of each project, using the firm's cost of capital. Which project is preferred in this situation? b. The firm uses the following equation to determine the risk-adjusted discount rate, RADR, for each project /: RADR, = RF + [RI; X (r - RF) ] where Ry = risk-free rate of return RI, = risk index for project j r = cost of capital Substitute each project's risk index into this equation to determine its RADR. c. Use the RADR for each project to determine its risk-adjusted NPV. Which proj- ect is preferable in this situation? d. Compare and discuss your findings in parts a and c. Which project do you rec- ommend that the firm accept? P12-10 Risk-adjusted discount rates: Tabular