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