Question

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 15.4%, and the risk-free rate, RF, is 9.8%. The firm has gathered the following basic cash flow and risk index data for each project EEB 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 where RF-risk-free rate of return, R, = risk index for project j , and 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 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? Project (j) Initial investment (CFo) $15,700 $11,000 $18,400 Year (t) Cash inflows (CFt) $6,000 6,000 6,000 6,000 1.85 $5,700 3,900 5,300 2,400 1.04 $3,500 6,300 9,000 11,900 0.63 4 Risk index (RI) a. Which project is preferred in this situation? (Select from the drop-down menu.) ProjectV, with the highest NPV, is preferred c. Which project is preferable in this situation? (Select from the drop-down menu.) Projectwill be preferable d. After adjusting the discount rate, even though all projects are still acceptable, the ranking changes. Project | ▼| has the highest risk-adjusted NPV and should be chosen

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

i have also given short cut to find PV FACTOR AT rates different than round figure, see first image, i have explained how to get pv factor for 15.4%. Thank you

Home ert Page Layout Formulas Data Review V Add-Ins В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛 Conditional Format C Formatting ▼ as Table-styles ▼ Insert Delete Format Format Painter Sort &Find & Filter Select 袖 2 Clear , ▼ ▼ ▼ OC PV FACTOR AT 15.4% PV OF CFAT PV FACTOR AT 15.4% 115700.00 -11000.00 -18400.00 5199.31 4939.34 3032.93 4505.47 2928.55 4730.74 3904.22 3448.725856.32 3383.20 1353.28 6710.02 1669.90 1930.01 1/1.154AO) 1/(1.1541) 111542) 1/1.154 3) 11.1544) 0.8666 0.6507 0.5639 1292.19 SELECT PROJECT G AS IT HAS HIGHEST NPV CALCULATION OF RADR RADR Rf +RI(r-Rf) 20.16% [-9.8% + 1.85%15.4%-9.8%) 15.62% [-9.8% +1.04*(15.4%-9.8%) 13.33% [-9.8% +0.63*(15.4%-9.8%) AA MIRR NPV IRR REPLACEMENT S HPR GMAM EAC MACRS RATIOCASHBUDGET Wacc BONDindiffEPS EBIT REPLACEMENT STats NPV BETA LEVERED 0 ตั้."z园遛14.י'alt@m*6 ENG 10-04-2019 1234 OE 554331 2 8 110 15352 FEFG OR OR OR FFFN 01234 - 23 5 678 - 23

Home ert Page Layout Formulas Data Review V Add-Ins Cut Σ AutoSum , a copy ▼ Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional Format. Cell. Insert Delete Format Sort &Find & Format Painter Clipboard Formatting as Table Styles ClearFilter Select Font Alignment Cells dting OB OC OD OE OF OG он Ol PV FACTOR AT 13.33% Oj OK OL OM 410 411 с 412 413 414 415 416 417 418 419 420 ans c 421 422 d 423 424 425 426 427 428 PV FACTORPV FACTOR PV OF CFAT YEAR AT 20.16% AT 15.62% FOR E FOR F FOR G 15700 6000 6000 18400 3500 6300 11000 5700 3900 5300 2400 0.8322 0.6926 0.5764 0.4797 0.8649 0.7481 0.6470 0.5596 1 -15700.00 11000.00 -18400.00 4929.94 3088.33 0.7786 4155.582917.42 4905.13 0.6870 3458.373429.07 6183.12 1343.01 7213.85 1619.45 2990.44 0.8824 4993.34 11900 0.60622878.14 214.57 NPV -- SELECT PROJECT G AS IT HAS HIGHER NPV PROJECT G has highest risk adjusted NPV and should be chosen RATIOCASHBUDGET Wacc BONDindiffEPS EBIT REPLACEMENT STats NPV BETA LEVERED 0 AA MIRR NPV IRR REPLACEMENT S HPR GMAM EAC MACRS erences: E147 13:16 รั้ "z 14.י'alt@m..o ENG 10-04-2019