Question: You are considering two mutually exclusive projects & you want to use a risk adjusted rate (RADR) to help make your decision. Here is what

You are considering two mutually exclusive projects & you want to use a risk adjusted rate (RADR) to help make your decision. Here is what we know

Cost of capital (call this the market return (Rm) in CAPM) is 12%
Risk free rate (Rf) is 7%

Cash flows for each of your two projects are as follows

Project BunkerProject Water hazard

Initial investment$200,000$300,000

Inflows Year 1$100,000$22,000

Year 2$75,000$98,000

Year 3$50,000$200,000

Year 4$100,000$195,000

Risk factor (b)0.81.2

Use a risk adjusted interest rate (RADR) to calculate the NPV of each project

Which project will you go forward with?

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