Question

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 firm are shown in the following tables

Project X | Project Y | Project Z | |

Initial Investment (CF0) | 179000 | 237000 | 314000 |

Year (t) | Cash inflows | ||

1 | 76000 | 60000 | 85000 |

2 | 69000 | 69000 | 85000 |

3 | 55000 | 79000 | 85000 |

4 | 59000 | 84000 | 85000 |

5 | 61000 | 95000 | 85000 |

Risk Classes and RADRs |
||

Risk Class |
Description |
Risk adjusted discount rate (RADR) |

I |
Lowest risk |
10.7 % |

II |
Below-average risk |
13.6 |

III |
Average risk |
15.7 |

IV |
Above-average risk |
19.6 |

V |
Highest risk |
22.5 |

a. Find the risk-adjusted NPV for each project.

b. Which project, if any, would you recommend that the firm undertake?

Answer #1

1)

Project X:

Project Y:

Project Z:

2)

**Select Project Y. It has highest positive risk adjusted
NPV**

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)...

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The basic cash flow data for each project and the risk classes
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