Question

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 12.3%, and they observe that the current risk-free rate of return is 7.4%. 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 table below in order to copy its contents into a spreadsheet.) Initial investmen Year (t) Project X Project Y $74,000 $78,000 Cash inflows (CF) $28,000 $27,000 28,000 31,000 28,000 41,000 28,000 51,000 AWN-

Answer 1

Cash flows Year Project X | Project Y [email protected]% [email protected]% А в 0 $ (74,000) $ (78,000) 1.000 1.000 1 $ 28,000 $ 27,000 0.884 0.874 2 $ 28,000 $ 31,000 0.781 0.763 3 $ 28,000 $ 41,000 0.691 0.667 4 $ 28,000 $ 51,000 0.610 0.583 NPV $ $ S $ $ Present value of cash flows Project X Project Y AxC BxD (74,000.00) S (78,000.00 24,749.63 $ 23,589.85 21,876.58S 23,663.80 27,344.39 17,092.31 $ 29,717.75 9,055.57 $ 26,315.79 Risk-adjusted discount rate - Project X 13.13% =7.4%+1.17*(12.3%-7.4%) Risk-adjusted discount rate - Project Y 14.46% =7.4%+1.44*(12.3%-7.4%) b) Project Y over project X. Project Y has higher NPV

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