Question

Risk-adjusted discount rates—Tabular After a careful evaluation of investment alternatives and opportunities, Masters School Supplies has developed a CAPM-type relationship linking a risk index to the required return (RADR), as shown in the table B. The firm is considering two mutually exclusive projects, A and B. Following are the data the firm has been able to gather about the projects. Project A $20,000 Initial investment (CF) Project life Annual cash inflow (CF) Risk index 8 years $8,000 0.2 Project B $30,000 8 years $9,100 1.4 All the firm's cash flows for each project have already been adjusted for taxes. a. Evaluate the projects using risk-adjusted discount rates. b. Discuss your findings in part (a), and recommend the preferred project. a. The net present value for project A is $ . (Round to the nearest cent.) The net present value for project B is $ . (Round to the nearest cent.) b. Discuss your findings in part (a), and recommend the preferred project. (Select from the drop-down menus.) Project is preferable to Project 6, since the NPV Of is greater than the NPV of C.

Answer 1

Project Alis preferable to safect B , since the NPV of Project A is greater than the NPV of Projekt B

DATE: ca) Project Calculation of NPV liven, Annual inflow = $8000 Like [n] = 8yrs Risk inden = 0.2 RADK CDiscount hated [fsem table] - NPV = Present Value of Total Cash inflows 7.996 ( initial investment Bunualinflems x Psesent Value AnuntyFactor (7.9:8,8893)) juutial investored 18000x 5.7685113568 - 20000 NPV = 46148.09 - 20000 $26, 148.09 - Project B Calculation of NPV Annual inflows = $9100 Lite (n = 8 years Kisk inden = 1.4 KADR [ Discount hate] [from Table] = 1207% NPV = Propeut Value of total Cashi iuflows - initial investment Annual linflows x lypeut Value Annuity factor (12.7:7, 8years)}6) imetal investe (-) 30000 (9100x4.84846145483 44121 - 30000 INPV = $14121
PLEASE DON'T FORGET TO GIVE A THUMBS UP ??!!