P12-20 RISK-ADJUSTED DISCOUNT RATES: BASIC Country Wallpapers is considering investing in one of threemutually exclusive projects, E, F, and G. The firm's cost of capital, r, is 10%, and the risk-free rate, RF, is 2%. Thefirm has estimated each project's cash flow and each project's beta, as shown in the following table. ExcelInitial investment (CF)Year (t)1234BetaEWhere-$15,000$6,0006,0006,0006,000RFB;RADR,1.80Project ()F-$11,000Cash inflows (CF,)$6,0004,0005,0002,0001.00Ga. Find the NPV of each project, using the firm's cost of capital. Which project is preferred in this situation?risk-free ratebeta of project;T'mrisk-adjusted discount rate for project ;expected return on market portfolioSubstitute each project's beta into this equation to determine its RADR.-$19,000b. The firm uses the following equation to determine the risk-adjusted discount rate, RADRj, for each project j:RADR, RF + B₂ × (rm RF)$ 4,0006,0008,00012,0000.602%10%c. Use the RADR for each project to determine its risk-adjusted NPV. Which project is preferable in thissituation?d. Compare and discuss your findings in parts a and c. Which project do you recommend that the firm accept?

Capital budgeting is a financial process used by businesses to evaluate and select investment…

P12-20 RISK-ADJUSTED DISCOUNT RATES: BASIC Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm's cost of capital, r, is 10%, and the risk-free rate, RF, is 2%. The firm has estimated each project's cash flow and each project's beta, as shown in the following table. Excel Initial investment (CF) Year (t) 1 N 3 Beta E Where -$15,000 RF B₂ RADR, = $6,000 6,000 6,000 6,000 1.80 Project () F -$11,000 Cash inflows (CF,) $6,000 4,000 5,000 2,000 1.00 a. Find the NPV of each project, using the firm's cost of capital. Which project is preferred in this situation? -$19,000 b. The firm uses the following equation to determine the risk-adjusted discount rate, RADRj, for each project j: RADR;= Rp + ß₂ × (rm · RF) risk-free rate beta of project, risk-adjusted discount rate for project; expected return on market portfolio Substitute each project's beta into this equation to determine its RADR. T'm $ 4,000 6,000 8,000 12,000 0.60 2% 10% c. Use the RADR for each project to determine its risk-adjusted 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?

P12-20 RISK-ADJUSTED DISCOUNT RATES: BASIC Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm's cost of capital, r, is 10%, and the risk-free rate, RF, is 2%. The firm has estimated each project's cash flow and each project's beta, as shown in the following table. Excel Initial investment (CF) Year (t) 1 N 3 Beta E Where -$15,000 RF B₂ RADR, = $6,000 6,000 6,000 6,000 1.80 Project () F -$11,000 Cash inflows (CF,) $6,000 4,000 5,000 2,000 1.00 a. Find the NPV of each project, using the firm's cost of capital. Which project is preferred in this situation? -$19,000 b. The firm uses the following equation to determine the risk-adjusted discount rate, RADRj, for each project j: RADR;= Rp + ß₂ × (rm · RF) risk-free rate beta of project, risk-adjusted discount rate for project; expected return on market portfolio Substitute each project's beta into this equation to determine its RADR. T'm $ 4,000 6,000 8,000 12,000 0.60 2% 10% c. Use the RADR for each project to determine its risk-adjusted 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?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows

Section: Chapter Questions

Problem 23SP: Start with the partial model in the file Ch10 P23 Build a Model.xlsx on the textbooks Web site....

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Risk-adjusted discount rates—Basic Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm’s cost of capital, r, is 10%, and the risk-free rate, RF, is 2%. 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…
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Q13-8
Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm’s cost of capital, r, is 10%, and the risk-free rate, RF, is 2%. The firm has estimated each project’s cash flow and each project’s beta, as shown in the following table. Project (j) E F G Initial investment (CF0) -$15,000 -$11,000 -$19,000 Year (t) Cash inflows (CFt) 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 Beta 1.80 1.00 0.60 a. Find the 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, RADRj, for each project j: RADRj = RF + Bj x (rm -RF) Where RF = risk-free rate 2% Bj = beta of project j RADRj = risk-adjusted discount rate for project j rm = expected return on market portfolio 10% Substitute each project’s beta into this equation to determine its RADR. c. Use the RADR for each project to…
The cash flows associated with an investment project are as follows: Project Y (200 000) 100 000 Year 100 000 120 000 110 000 The discount rate is 8 percent. What's the discount payback period of the projects? (compile a spreadsheet) Calculate NPV, PI of a projects Calculate IRR of a projects Should the firm accept the project? a) b) c) d) 01234
Comparing Investment Criteria [L01,2,3,5,7] Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$300,000 -$40,000 1 20,000 19,000 2 50,000 12,000 3 50,000 18,000 4 390,000 10,500 Whichever project you choose, if any, you require a 15 per cent return on your investment. a. If you apply the payback criterion, which will you choose? Why? b. If you apply the discounted payback criterion, which investment will you choose? Why? c. If you apply the NPV criterion, which investment will you choose? Why? d. If you apply the IRR criterion, which investment will you choose? Why? e. If you apply the profitability index criterion, which investment will you choose? Why? f. Based on your answers in (a) through (e), which project will you finally choose? Why? Please explain your calculations and conclusions
am. 117.
Q2. a) MAP Ltd. is a Pakistan based firm that is considering the location of new investment projects. They have to invest 35 percent of their funds in Pakistan. For the remaining 65% funds they are considering two different locations i.e. Middle East and Africa. The characteristics of the proposed projects are as follows. Compute portfolio risk and return: 35% For 30% funds 35% funds Investment in if invested if invested Pakistan in M East in Africa Project's expected after-tax return mean 14% 16% 16% annual Standard deviation of 0.07 0.11 0.12 project's return Correlation of 0.21 0.08 project's returns of Pakistan's investment with return on the other options Page 2 of 4 ***correlation of 30% Middle East investment's return with returns from 35% Africa's investment-0.17 a) Discuss factors to be considered a MNC while investing in foreign countries.
A 07. Subject:- finance
(Table: Investment Projects) Use Table: Investment Projects. If the market interest rate declines from 15% to 11.5%, then the quantity of loanable funds demanded will increase by: Project IF G ІН || J Z L M a. $200. b. $1,000. c. $2,000. d. $2,200. Rate of Return on Investment 20% 18 16 14 12 10 18 6 Cost of Investment $500 300 1,000 200 2,000 1,500 1,200 800
Ab. 106.
Start with the partial model in the file Ch10 P23 Build a Model.xlsx on the textbooks Web site. Gardial Fisheries is considering two mutually exclusive investments. The projects expected net cash flows are as follows: a. If each projects cost of capital is 12%, which project should be selected? If the cost of capital is 18%, what project is the proper choice? b. Construct NPV profiles for Projects A and B. c. What is each projects IRR? d. What is the crossover rate, and what is its significance? e. What is each projects MIRR at a cost of capital of 12%? At r = 18%? (Hint: Consider Period 7 as the end of Project Bs life.) f. What is the regular payback period for these two projects? g. At a cost of capital of 12%, what is the discounted payback period for these two projects? h. What is the profitability index for each project if the cost of capital is 12%?