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​-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) 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