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 have 5-year lives, they possess differing degrees of risk. Project X is in class V, the highest-risk class, project is in dass 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 a. Find the risk-adjusted NPV for each project. b. Which project, if any, would you recommend that the firm undertake? a. The net present value for project Xiss (Round to the nearest cent) Enter your answer in the answer box and then click Check Answer 3 parts remaining Clear All Check Answer

Answer 1

a)

Project X

Since it is in class V, rate = 23.3%

Statement showing NPV

Year	Cash flow	PVIF @ 23.3%	PV
	A	B	C= A x B
1	80000	0.8110	64882.40
2	69000	0.6578	45386.11
3	63000	0.5335	33608.67
4	61000	0.4327	26392.32
5	61000	0.3509	21404.96
Total of PV of cash Inflow	191674.46
Less: Initial investment	183000.00
NPV	8674.46

Thus NPV = $8674.46

Project Y

Since it is in Class II , rate = 14%

Statement showing NPV

Year	Cash flow	PVIF @ 14%	PV
	A	B	C= A x B
1	50000	0.8772	43859.65
2	61000	0.7695	46937.52
3	72000	0.6750	48597.95
4	90000	0.5921	53287.22
5	97000	0.5194	50378.76
Total of PV of cash Inflow	243061.10
Less: Initial investment	232000.00
NPV	11061.10

Thus NPV of project Y = $11061.10

Project Z

Since it is in class III , rate = 16.2%

Statement showing NPV

Year	Cash flow	PVIF @ 16.2%	PV
	A	B	C= A x B
1	86000	0.8606	74010.33
2	86000	0.7406	63692.19
3	86000	0.6374	54812.56
4	86000	0.5485	47170.88
5	86000	0.4720	40594.56
Total of PV of cash Inflow	280280.51
Less: Initial investment	306000.00
NPV	-25719.49

Thus NPV of project Z = -25719.49 $

b) Project Y should be selected as it has highest NPV