TOPIC 6: CAPITAL BUDGETING TECHNIQUES ABC Manufacturing is considering two (2) mutually exclusive investments. The company wishes to use a CAPM-Type risk-adjusted discount rate (RADR) in its analysis. ABC's managers believe that the appropriate market rate of return is 10%, and they observe that the current risk-free rate of return is 5%. Cash flows associated with the two (2) projects are shown in the table below Project x $110,000 Project y $120,000 Year Net Cash Inflows (NCFt) 1 $40,000 $32,000 2 $40,000 $42,000 3 $40,000 $48,000 4 $40,000 $56,000 Answer the following questions: a. Use a risk-adjusted discount rate approach to calculate the net present value of each project, given that project X has a RADR factor (Risk Index) of 1.20 and project Y has an RADR factor (Risk Index) of 1.4. Please note that the RADR factors are similar to project betas. b. Discuss your findings in part a and recommend the preferred project.

Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
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Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
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TOPIC 6: CAPITAL BUDGETING TECHNIQUES
ABC Manufacturing is considering two (2) mutually exclusive investments. The company
wishes to use a CAPM-Type risk-adjusted discount rate (RADR) in its analysis. ABC's
managers believe that the appropriate market rate of return is 10%, and they observe
that the current risk-free rate of return is 5%. Cash flows associated with the two (2)
projects are shown in the table below
Project x
$110,000
Project y
$120,000
Year
Net Cash Inflows (NCFt)
1
$40,000
$32,000
2
$40,000
$42,000
3
$40,000
$48,000
4
$40,000
$56,000
Answer the following questions:
a.
Use a risk-adjusted discount rate approach to calculate the net present value
of each project, given that project X has a RADR factor (Risk Index) of 1.20
and project Y has an RADR factor (Risk Index) of 1.4. Please note that the
RADR factors are similar to project betas.
b. Discuss your findings in part a and recommend the preferred project.
Transcribed Image Text:TOPIC 6: CAPITAL BUDGETING TECHNIQUES ABC Manufacturing is considering two (2) mutually exclusive investments. The company wishes to use a CAPM-Type risk-adjusted discount rate (RADR) in its analysis. ABC's managers believe that the appropriate market rate of return is 10%, and they observe that the current risk-free rate of return is 5%. Cash flows associated with the two (2) projects are shown in the table below Project x $110,000 Project y $120,000 Year Net Cash Inflows (NCFt) 1 $40,000 $32,000 2 $40,000 $42,000 3 $40,000 $48,000 4 $40,000 $56,000 Answer the following questions: a. Use a risk-adjusted discount rate approach to calculate the net present value of each project, given that project X has a RADR factor (Risk Index) of 1.20 and project Y has an RADR factor (Risk Index) of 1.4. Please note that the RADR factors are similar to project betas. b. Discuss your findings in part a and recommend the preferred project.
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