Country Wallpapers is considering investing in one of three mutually exclusive p
ID: 2715009 • Letter: C
Question
Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm’s 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 firm’s 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 project’s 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 firm’s 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 firm’s 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 project’s 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
please show step by step
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
Explanation / Answer
Project (j) E F G Initial Investment (CF0) -15,000 -11,000 -19,000 Year (t) 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 12,000 a NPV 2,129.87 1,673.05 1,136.29 preferable in this situation preferable b Risk Adjusted Cost of Capital =10+1.8*(15-10) =10+1*(15-10) =10+0.6*(15-10) Risk Adjusted Cost of Capital 19% 15% 13% Risk Adjusted NPV 831.51 1,673.05 2,142.93 preferable in this situation preferable C Adding in the risk factors completely reverses the standings on which project would be the suggested choice. I would recommend Project G for the fact that the risk was taken into account, therefore decreasing your chances for loss.