Calculate the net present value of each project

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Question - XYZ Manufacturing is considering two (2) mutually exclusive investments. The company wishes to use a CAPM-Type risk-adjusted discount rate (RADR) in its analysis. XYZ'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.

Reference no: EM132759296

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