Homework Homework Set 4 Score 0 of 2 pts P1124 similar to Sa

Homework: Homework Set 4 Score: 0 of 2 pts P11-24 (similar to) Save 17 of 25 (20 complete) ? HW Score: 65.94%, 32.97 of 50 pts ?Question Help * 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 15.1%, and the risk-free rate, RF, is 9.6%. 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 where RF = risk-free rate of return, RI,-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? Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Project (j) $19,000 Initial investment (CFO) Year (t) $15,400 $11,000 Cash inflows (CF) $6,100 6,100 6,100 6,100 1.76 $5,700 4,400 5,400 2,200 0.99 $4,500 6,200 8,700 11,400 0.59 Risk index (R) Print Done Press Continue to see more

Solution

a) Statemrnt showing NPV using firm\'s cost of capital

Thus project F should be selected

b) Statement showing RADR

c) Statement showing NPV using RADR

Thus Project G should be selected

D) Due to less riskiness of project G , its cost of capital decreased thus it\'s npv increased. As in par t c, risk was taken into consideratioin project G would be chooses as against answer of part a

	Project E	Project F	Project G
Year	Cash flow	PVIF @15.1%	Present value	Cash flow	PVIF @15.1%	Present value	Cash flow	PVIF @15.1%	Present value
0	-15400	1.0000	-15400	-11000	1.0000	-11000	-19000	1.0000	-19000
1	6100	0.8688	5300	5700	0.8688	4952	4500	0.8688	3910
2	6100	0.7548	4604	4400	0.7548	3321	6200	0.7548	4680
3	6100	0.6558	4000	5400	0.6558	3541	8700	0.6558	5705
4	6100	0.5698	3476	2200	0.5698	1253	11400	0.5698	6495
NPV			1980			2068			1790