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?

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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A 07. Subject:- finance
Question Sun Plc has been specially formed to undertake two investment opportunities. The risk and return characteristics of the two projects are shown below: X Y Expected Return 10% 20% Risk (standard deviation) 4% 7% Sun plans to invest 60% of its available funds in Project X and 40% in Project Y. The directors believe that the correlation coefficient between the returns of the projects is +0.18. Required: i. Calculate the expected return from the proposed portfolio of Projects X and Y. ii. Calculate the risk of the portfolio and comment upon your result in the context of the risk reduction effect of diversification. iii. How could Sun Plc invest its funds in order to obtain a minimum-risk portfolio? -----
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Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow: −$7,100 $1,000 $2,200 $1,400 $1,400 $1,200 $1,000 Use the IRR decision rule to evaluate this project. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.) Should it be accepted or rejected?multiple choice accepted rejected
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3.0 and 3.5 years, respectively. Time: 0 1 2 3 4 5 Cash flow: -S 245,000 $ 66,800 $ 85,000 $ 142,000 $ 123,000 $ 82, 200 Use the Pl decision rule to evaluate this project. Note: Do not round intermediate calculations and round your final answer to 2 decimal places. Should it be accepted or rejected? (Click to select)
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively. Time: 0 1 2 3 4 5 Cash flow: −$362,000 $65,300 $83,500 $140,500 $121,500 $80,700 Use the PI decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Should it be accepted or rejected?multiple choice accepted rejected
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 13 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively. Time: 0 1 2 3 4 5 Cash flow: −$ 225,000 $ 64,800 $ 83,000 $ 140,000 $ 121,000 $ 80,200 Use the IRR decision rule to evaluate this project. Note: Do not round intermediate calculations and round your final answer to 2 decimal places.
A firm wants to start a project. A team of financial analysts estimated the following cash flows year cash flow 0 -$100,000 1 55,000 2 43,000 3 45,000 Suppose that the discount rate (interest rate) is 12%. The profitability index (PI) is Group of answer choices 15,416.59 1.15 0.87 2.15
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…
Km. 212.
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively. Time: 0 1 2 3 4 5 Cash flow: −$356,000 $65,700 $83,900 $140,900 $121,900 $81,100 Use the NPV decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Should it be accepted or rejected?multiple choice accepted rejected

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