Risk-adjusted rates of return using CAPM Centennial Catering, Inc., is considering two mut...

Risk-adjusted rates of return using CAPM Centennial Catering, Inc., is considering two mutually exclusive investments. The company wishes to use a CAPM-type riskadjusted discount rate (RADR) in its analysis. Centennial’s managers believe that the appropriate market rate of return is 12%, and they observe that the current risk-free rate of return is 7%. Cash flows associated with the two projects are shown in the following table.

a. Use a risk-adjusted discount rate approach to calculate the net present value of each project, given that project X has an RADR factor of 1.20 and project Y has an RADR factor of 1.40. The RADR factors are similar to project betas. (Use Equation 12.5 to calculate the required project return for each.)

rproject j = RF + [bproject j × (rm − RF)]

b. Discuss your findings in part a, and recommend the preferred project.