Question

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 0 ) $67,000 $75,000

Year (t ) Cash inflows (CF Subscript t )

1 $26,000 $21,000

2 26,000 30,000

3 26,000 42,000

4 26,000 46,000

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 1.17 and project Y has an RADR factor of 1.38 . The RADR factors are similar to project betas.

b. Discuss your findings in part (a), and recommend the preferred project. a. The risk-adjusted discount rate for project X will be nothing %. (Round to two decimal places.)

Answer #1

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...

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...

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Risk classes and RADR Moses Manufacturing is attempting to
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5
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Platinum, Inc. is considering two mutually exclusive projects, X
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