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. Project X Project Y Project Z Initial investment (CF0) $179,000 $235,000 $312,000 Year (t ) Cash inflows (CFt) 1 $80,000 $56,000 $85,000 2 66,000 68,000 85,000 3 62,000 73,000 85,000 4 55,000 84,000 85,000 5 65,000 96,000 85,000 Risk Classes and RADRs Risk Class Description Risk adjusted discount rate (RADR) I Lowest risk 10.6% II Below-average risk 13.7 III Average risk 15.8 IV Above-average risk 19.6 V Highest risk 22.7 a. Find the risk-adjusted NPV for each project. b. Which project, if any, would you recommend that the firm undertake?
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. Project X Project Y Project Z Initial investment (CF0) $179,000 $235,000 $312,000 Year (t ) Cash inflows (CFt) 1 $80,000 $56,000 $85,000 2 66,000 68,000 85,000 3 62,000 73,000 85,000 4 55,000 84,000 85,000 5 65,000 96,000 85,000 Risk Classes and RADRs Risk Class Description Risk adjusted discount rate (RADR) I Lowest risk 10.6% II Below-average risk 13.7 III Average risk 15.8 IV Above-average risk 19.6 V Highest risk 22.7 a. Find the risk-adjusted NPV for each project. b. Which project, if any, would you recommend that the firm undertake?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
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.
|
|
Project X
|
Project Y
|
Project Z
|
|
|
Initial investment
(CF0)
|
$179,000
|
$235,000
|
$312,000
|
|
|
Year
(t )
|
(CFt)
|
|
||
|
1
|
$80,000
|
$56,000
|
$85,000
|
|
|
2
|
66,000
|
68,000
|
85,000
|
|
|
3
|
62,000
|
73,000
|
85,000
|
|
|
4
|
55,000
|
84,000
|
85,000
|
|
|
5
|
65,000
|
96,000
|
85,000
|
|
|
Risk Classes and RADRs
|
||
|
Risk Class
|
Description
|
Risk adjusted discount rate (RADR)
|
|
I
|
Lowest risk
|
10.6%
|
|
II
|
Below-average risk
|
13.7
|
|
III
|
Average risk
|
15.8
|
|
IV
|
Above-average risk
|
19.6
|
|
V
|
Highest risk
|
22.7
|
a. Find the risk-adjusted NPV for each project.
b. Which project, if any, would you recommend that the firm undertake?
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