Zeina Co. is considering investment in one of two mutually exclusive projects X and Y which...
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Zeina Co. is considering investment in one of two mutually exclusive projects X and Y which are described below. Zeina Co.'s overall cost of capital is 15 %, the market return is 15 % and the risk-free rate is 5 %. Zeina Co. estimates that the beta for project X is 1.20 and the beta for project Y is 1.40. Initial Investment (CFo) (EGP000) Year 1 2 3 4 Project X EGP 3,500 Cash Inflows EGP 1,500 1,500 1,500 1,500 Project Y EGP 3,900 (CF) (EGP000) EGP 1,100 1,600 1,900 2,300 Required a) Calculate the risk-adjusted discount rates for project X and project Y. b) Using the risk-adjusted discount rate method of project evaluation, find the NPV for projects X and Y. Which project should Zeina Co. select using this method? c) Calculate the NPV of projects X and Y assuming that the firm did not employ the RADR method and instead used the firm's overall cost of capital to evaluate projects X and Y. d) What potential biases exist in project selection if Zeina Co. did not adjust for the difference in risk between projects X and Y Zeina Co. is considering investment in one of two mutually exclusive projects X and Y which are described below. Zeina Co.'s overall cost of capital is 15 %, the market return is 15 % and the risk-free rate is 5 %. Zeina Co. estimates that the beta for project X is 1.20 and the beta for project Y is 1.40. Initial Investment (CFo) (EGP000) Year 1 2 3 4 Project X EGP 3,500 Cash Inflows EGP 1,500 1,500 1,500 1,500 Project Y EGP 3,900 (CF) (EGP000) EGP 1,100 1,600 1,900 2,300 Required a) Calculate the risk-adjusted discount rates for project X and project Y. b) Using the risk-adjusted discount rate method of project evaluation, find the NPV for projects X and Y. Which project should Zeina Co. select using this method? c) Calculate the NPV of projects X and Y assuming that the firm did not employ the RADR method and instead used the firm's overall cost of capital to evaluate projects X and Y. d) What potential biases exist in project selection if Zeina Co. did not adjust for the difference in risk between projects X and Y
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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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