ABC Appliance Company uses the CAPM to determine its risk-adjusted discount rate, (RADR), for each of its projects:
Rj = RF + [b * (rm â RF)]
The company is currently interested in investing in the capital project shown below. The return on market is 9.65%, the risk-free
rate is currently 8% and the project has a beta of 2.5.
Initial Investment
($3,900,000)
Year
Cash Inflow
1
1,500,000
2
1,750,000
3
2,500,000
A. Using the CAPM compute the RADR
B. Compute the Risk-Adjusted NPV of the project.
ABC Appliance Company uses the CAPM to determine its risk-adjusted discount rate, (RADR), for each of its projects:
Rj = RF + [b * (rm â RF)]
The company is currently interested in investing in the capital project shown below. The return on market is 9.65%, the risk-free
rate is currently 8% and the project has a beta of 2.5.
Initial Investment
($3,900,000)
Year
Cash Inflow
1
1,500,000
2
1,750,000
3
2,500,000
A. Using the CAPM compute the RADR
B. Compute the Risk-Adjusted NPV of the project.
Related questions
Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firmâs cost of capital, r, is 15%, and the risk free rate, Rf, is 10%. The firm has gathered the basic cash flow and risk index data for each project as shown in the following table.
| Project (j) | |||
| E | F | G | |
| Initial Investment (CF0) | -$15,000 | -$11,000 | -$19,000 |
| Year (t) | Cash Inflows | ||
| 1 | $6,000 | $6,000 | $4,000 |
| 2 | 6,000 | 4,000 | 6,000 |
| 3 | 6,000 | 5,000 | 8,000 |
| 4 | 6,000 | 2.000 | 12,000 |
| Risk index (RIj) | 1.80 | 1.00 | 0.60 |
Find the net present value (NPV) of each project using the firmâs cost of capital. Which project is preferred in this situation?
The firm uses the following equation to determine the risk-adjusted discount rate, RADR, for each project j: RADRj=Rf + [RIj x (r-Rf)]
Where: Rf=risk free rate of return
RIj=risk index for project j
r=cost of capital
Substitute each projectâs risk index into this equation to determine its RADR.
Use the RADR for each project to determine its risk-adjusted NPV. Which project is preferable in this situation?
Compare and discuss your finding in part a and c. Which project do you recommend that the firm accept?Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firmâs cost of capital, r, is 15%, and the risk free rate, Rf, is 10%. The firm has gathered the basic cash flow and risk index data for each project as shown in the following table.
| Project (j) | |||
| E | F | G | |
| Initial Investment (CF0) | -$15,000 | -$11,000 | -$19,000 |
| Year (t) | Cash Inflows | ||
| 1 | $6,000 | $6,000 | $4,000 |
| 2 | 6,000 | 4,000 | 6,000 |
| 3 | 6,000 | 5,000 | 8,000 |
| 4 | 6,000 | 2.000 | 12,000 |
| Risk index (RIj) | 1.80 | 1.00 | 0.60 |
Find the net present value (NPV) of each project using the firmâs cost of capital. Which project is preferred in this situation?
The firm uses the following equation to determine the risk-adjusted discount rate, RADR, for each project j: RADRj=Rf + [RIj x (r-Rf)]
Where: Rf=risk free rate of return
RIj=risk index for project j
r=cost of capital
Substitute each projectâs risk index into this equation to determine its RADR.
Use the RADR for each project to determine its risk-adjusted NPV. Which project is preferable in this situation?
Compare and discuss your finding in part a and c. Which project do you recommend that the firm accept?
p12-8 using excel
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