Question

(TCOs F, G) Discuss the problems associated with the use of a risk-adjusted discount rate in cash flow analysis

Answer #1

Assume that the risk-free rate is 5%, the risk-adjusted discount
rate is 10%, the expected cash flow for t = 1 is 495, and
the expected cash flow for t = 2 is 508.2
a)Assume that the cash flow risk increases geometrically through
time. Compute the present value of the cash flow stream using the
certainty equivalent method.
b) Assume that the cash flow risk remains constant through time.
Compute the present value of the cash flow stream using the...

(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
expected cash flows for...

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...

A 5-year project has a risk-adjusted discount rate of 9% p.a.
The investment would be needed right away (i.e., in 2020), and
sales will occur from 2021 to 2025. You've already crunched the
numbers and found the cash flows (CF) associated with the project,
which are shown below. For simplicity, assume the given CF are in
dollars (i.e., not thousands nor millions of dollars). Year 2020
2021 2022 2023 2024 2025 CF -187 159 109 153 157 273 Find the...

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...

In the ________________ method, expected cash flows are used in
the valuation process, and the risk adjustment is made to the
discount rate. Question 20 options: Certainty equivalent
Risk-adjusted discount rate (RADR) Sensitivity analysis Scenario
analysis

In today's world, all countries in the world use fiat money.
Explain what problems are associated with using fiat money, and
discuss what possible risks if an economy relies on commodity money
alone.

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...

Remember that the discount rate is the interest rate that we use
to find the present value of a cash flow or a lump sum. If you have
$10,000 in 10 years, what would be the value of that $10,000 today.
We would need to calculate the present value using 10 years as the
number of periods (n), a discount rate (r) that we would need to
determine, and we know the future value (fv) is $10,000. What if we...

Use Excel to find the solution to the following problems...
Suppose the real risk free rate of interest is 3%. Inflation is
expected to be 5% for 4 years and then 7% thereafter. The maturity
risk premium is 0.1%(t), where t is the number of years until
maturity. The default risk premium is 3%. The liquidity premium is
1%. What is the nominal interest rate on a 6 year bond?
Assume the yield on a 6 year treasury bond is...

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