Question

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	$48,000
4	$40,000	$56,000

Answer the following questions:

Use a risk-adjusted discount rate approach to calculate the net present value of each project, given that project X has a RADR factor (Risk Index) of 1.20 and project Y has an RADR factor (Risk Index) of 1.4. Please note that the RADR factors are similar to project betas.

Answer 1