Solution-Use each project''s radr to select the better

Use each project''s radr to select the better project

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Reference no: EM131108731

Like most firms in its industry, Yeastime Bakeries uses a subjective risk assessment tool of its own design. The tool is a simple index by which projects are ranked by level of perceived risk on a scale of 0-10. The scale is recreated in the following table.

Risk index Required return0 ..... 4.0% (current risk-free rate)

1 .............. 4.5

2 .............. 5.0

3 .............. 5.5

4 .............. 6.0

5 .......... 6.5 (current IRR)

6 .............. 7.0

7 .............. 7.5

8 .............. 8.0

9 ............. 8.5

10 .............. 9.0

The firm is analyzing two projects based on their RADRs. Project Sourdough requires an initial investment of $12,500 and is assigned a risk index of 6. Project Greek Salad requires an initial investment of $7,500 and is assigned a risk index of 8. The two projects have 7-year lives. Sourdough is projected to generate cash inflows of $5,500 per year. Greek Salad is projected to generate cash inflows of $4,000 per year. Use each project's RADR to select the better project.

Reference no: EM131108731

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Use each project''s radr to select the better project

Reference no: EM131108731

Reference no: EM131108731

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