Risk-adjusted discount rates-Basic Country Wallpapers is considering investing in one of three mutually exclusive projects, E,...
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Risk-adjusted discount rates-Basic Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm's cost of capital, r, is 15.2%, and the risk-free rate, R, is 10.3%. The firm has gathered the following basic cash flow and risk index data for each project 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 j: RADR₁ = Re+Rijx (r-RF) where R = risk-free rate of return, Rl;= risk index for project j, and r = cost of capital. c. Use the RADR for each project to determine its risk-adjusted NPV. Which project is preferable in this situation? d. Compare and discuss your findings in parts (a) and (c). Which project do you recommend that the firm accept? a. Find the net present value (NPV) of each project using the firm's cost of capital. Initial investment (CF) Year (t) 1 2 3 4 Risk index (Rl;) E $14,500 $5,700 5,700 5,700 5,700 1.83 Project (j) F $11,000 Cash inflows (CF₂) $6,300 4,500 4,900 2,200 0.96 G $19,600 $4,300 5,400 8,100 12,800 0.65 Risk-adjusted discount rates-Basic Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm's cost of capital, r, is 15.2%, and the risk-free rate, R, is 10.3%. The firm has gathered the following basic cash flow and risk index data for each project 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 j: RADR₁ = Re+Rijx (r-RF) where R = risk-free rate of return, Rl;= risk index for project j, and r = cost of capital. c. Use the RADR for each project to determine its risk-adjusted NPV. Which project is preferable in this situation? d. Compare and discuss your findings in parts (a) and (c). Which project do you recommend that the firm accept? a. Find the net present value (NPV) of each project using the firm's cost of capital. Initial investment (CF) Year (t) 1 2 3 4 Risk index (Rl;) E $14,500 $5,700 5,700 5,700 5,700 1.83 Project (j) F $11,000 Cash inflows (CF₂) $6,300 4,500 4,900 2,200 0.96 G $19,600 $4,300 5,400 8,100 12,800 0.65
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Related Book For
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter
Posted Date:
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