Question

Risk-adjusted rates of return using CAPM Centennial Catering, Inc., is considering two mutually exclusive investments. The company wishes to use a CAPM-type risk-adjusted discount rate (RADR) in its analysis. Centennial's managers believe that the appropriate market rate of return is 12.1 %, and they observe that the current risk-free rate of return is 6.5 %. Cash flows associated with the two projects are shown in the following 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.)

ProjectX Project Y

Initial investment (CF0) $75,000
$85,000

Year (t) Cash inflows

1 $26,000 $23,000

2 26,000 34,000

3 26,000 36,000

4 26,000 49,000

a. Use a risk-adjusted discount rate approach to calculate the net present value of each project, given that project X has an RADR factor of

1.241.24

and project Y has an RADR factor of

1.411.41.

The RADR factors are similar to project betas.

b. Discuss your findings in part

(a), and recommend the preferred project.

Answer #1

P12-12 (similar to) Risk-adjusted rates of return using
CAPM Centennial Catering, Inc., is considering two mutually
exclusive investments. The company wishes to use a CAPM-type
risk-adjusted discount rate (RADR) in its analysis. Centennial's
managers believe that the appropriate market rate of return is 12.1
% , and they observe that the current risk-free rate of return is
6.9 % . Cash flows associated with the two projects are shown in
the following table.
Project X Project Y
Initial investment (CF...

JTR Manufacturing is considering two (2) mutually exclusive
investments. The company wishes to use a CAPM-Type risk-adjusted
discount rate (RADR) in its analysis. JTR’s managers believe that
the appropriate market rate of return is 10%, and they observe that
the current risk-free rate of return is 5%. Cash flows associated
with the two (2) projects are shown in the table below
Project X
$110,000
Project Y
$120,000
YEAR
NET CASH INFLOWS (NCFt)
1
$40,000
$32,000
2
$40,000
$42,000
3
$40,000...

Risk classes and RADR Moses Manufacturing is attempting to
select the best of three mutually exclusive projects, X, Y, and
Z. Although all the projects have5-yearlives, they possess
differing degrees of risk. Project X is in class V, the
highest-risk class; project Y is in class II, the
below-average-risk class; and project Z is in class III, the
average-risk class. The basic cash flow data for each project and
the risk classes and risk-adjusted discount rates (RADRs) used by
the...

Risk classes and RADR Moses Manufacturing is attempting to
select the best of three mutually exclusive projects, X, Y, and
Z. Although all the projects have
5
-year
lives, they possess differing degrees of risk. Project X is in
class V, the highest-risk class; project Y is in class II, the
below-average-risk class; and project Z is in class III, the
average-risk class. The basic cash flow data for each project and
the risk classes and risk-adjusted discount rates (RADRs)...

Country Wallpapers is considering investing in one of three
mutually exclusive projects, E, F, and G. The firm's cost of
capital, r ,is 14.8 %, and the risk-free rate, Upper R Subscript
Upper F, is 9.7 %. The firm has gathered the following basic cash
flow and risk index data for each project
Project
E
F
G
Initial Investment (CF0)
15700
11000
19900
Year
Cash Flows
1
6300
5600
4200
2
6300
3800
5700
3
6300
4900
9000
4
6300...

(Capital asset pricing model)
Using the CAPM, estimate the appropriate required rate of
return for the three stocks listed here, given that the risk-free
rate is 6
percent and the expected return for the market is 17
percent.
STOCK
BETA
A
0.75
B
0.94
C
1.31
(Click on the icon located on the top-right corner of the data
table above in order to copy its contents into a
spreadsheet.)
a. Using the CAPM, the required rate of return for stock...

(Risk-adjusted discount rates and risk classes)
The G. Wolfe Corporation is examining two capital-budgeting
projects with 5-year lives. The first, project A, is a
replacement project; the second, project B, is a project
unrelated to current operations. The G. Wolfe Corporation uses the
risk-adjusted discount rate method and groups projects according
to purpose, and then it uses a required rate of return or discount
rate that has been preassigned to that purpose or risk class. The
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