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 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 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 X is Round to the nearest cent.)

Answer 1

a)

Year! Cashflow [email protected]% Present value 1.000 $ 0.818 $ 0.670 $ 0.548 $ 0.448 $ 0.367 $ 01 $ (185,000) 1$ 83,000 2 $ 69,000 3 $ 64,000 4$ 62,000 5$ 57,000 185,000.00 67,921.44 46,206.88 35,072.47 27,803.97 20,917.94 $ 12,922.70 Project X NPV

Year! Cashflow [email protected]% Present value 0 (235,000 1|$ 60,000 2 $ 64,000 3 $ 78,000 4 $80,000 5 $ 99,000 1.000$ 0.883 $ 0.779 $ 0.688 $ 0.607 $ 0.536 $ 235,000.00 52,956.75 49,856.31 53,629.64 48,547.89 53,025.61 23,016.20 Project Y NPV

Year! Cashflow [email protected]% Present value 0 (312,000) 1$89,000 2 $ 89,000 3 $ 89,000 4$ 89,000 5$ 89,000 1.000 $ 0.866 $ 0.750 $ 0.649| $ 0.562 $ 0.487 $ 312,000.00 77,056.28 66,715.39 57,762.24 50,010.60 43,299.22 $-17,156.27 Project Z NPV

b)

Project Y should be accepted.