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?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter14: Multinational Capital Budgeting

Section: Chapter Questions

Problem 30QA

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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…
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