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IED www.mathxl.com/Stu x?homework!d=439506576&questio; School Tools How to take a screenshot on your Mac Ap Course Home Do Homework Allenson Gepford Finance question | Chegg.com BA 303 Fall 2017 Allenson Gepford 1 1 1/26/17 5:03 PM Homework: Homework 9 Chapters 9 and 12 Score: 0 of 20 pts P12-8 (similar to) Save 39 of 42 (38 complete) HW Score: 62.96%, 68 of 108 pts Question Help Risk-ad usted discount rates--Basic Country Wallpapers s considering investing in one o three mutually exclusive projects E, F, and G Thefim 's cost o capital, r is 14.6%, and the risk-free rate RF s 9.5%. The firm has gathered the following basic cash flow and risk index data for each project a. Find the net present value (NPV) of each project using the firm's cost of capital. Which project is preferred in this situation? b. The firm uses the following equation to determine the risk-adjusted discount rate, RADRfor each project j RADR,Re+R,x (r-R where RF = risk-free rate of return, Ry-risk index for project j , and r = cost of capital. c. Use the RADR for each project to determine its risk-edjusted NPV. Which project is preferable in this situation? d. Compare and discuss your findings in parts (a) and (c). Which project do you recommend that the firm accept? a. Find the net present value (NPV) of each project using the firm's cost of capital The net present value for project E is $. (Round to the nearest cent.) Enter your answer in the answer box and then click Check Answer Clear All Check Answer remainingExplanation / Answer
a) PROJECT E: YEAR CASH FLOWS 0 -15100 1 6100 2 6100 3 6100 4 6100 NPV= 6100*(1.146^4-1)/(0.146*1.146^4)-15100 = $ 2,457.23 PROJECT F: YEAR CASH FLOWS PVIF AT 14.6% PV AT 14.6% 0 -11000 1 -11000.00 1 6300 0.87260 5497.38 2 4000 0.76143 3045.73 3 4700 0.66443 3122.80 4 2200 0.57978 1275.51 NPV = 1941.42 PROJECT G: YEAR CASH FLOWS PVIF AT 14.6% PV AT 14.6% 0 -18200 1 -18200.00 1 4100 0.87260 3577.66 2 8000 0.76143 6091.45 3 13000 0.66443 8637.53 4 2200 0.57978 1275.51 NPV = 1382.15 PREFERENCE: PROJECT E which has the highest NPV. b) RADR: Project E = 9.5+1.78*(14.6-9.5) = 18.58 % Project F = 9.5+1.05*(14.6-9.5) = 14.86 % Project G = 9.5+0.58*(14.6-9.5) = 12.46 % c) PROJECT E: YEAR CASH FLOWS 0 -15100 1 6100 2 6100 3 6100 4 6100 NPV= 6100*(1.1858^4-1)/(0.1858*1.1858^4)-15100 = $ 1,126.02 PROJECT F: YEAR CASH FLOWS PVIF AT 14.86% PV AT 14.86% 0 -11000 1 -11000.00 1 6300 0.87063 5484.94 2 4000 0.75799 3031.95 3 4700 0.65992 3101.64 4 2200 0.57455 1264.00 NPV = 1882.53 PROJECT G: YEAR CASH FLOWS PVIF AT 12.46% PV AT 12.46% 0 -18200 1 -18200.00 1 4100 0.88921 3645.74 2 8000 0.79069 6325.48 3 13000 0.70308 9140.06 4 2200 0.62518 1375.40 NPV = 2286.69 PREFERENCE: PROJECT G which has the highest NPV. d) In Part [a] the same discount rate was used assuming that the projects had the same risk, which is not correct. In Part [c], each project's cash flows were discounted with a risk adjusted discount rate approriate to its risk., which is fair. Hence, Project G should be preferred as it has the highest NPV when discounted with RADR.