Considering investing in mutually exclusive projects

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Reference no: EM131010141

Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F and G. The firm's cost of capital, r, is 15%, and the risk free rate (Rf) is 10%. The firm has gathered the following basic cash flow and risk index data for each project. Project E Project F Project G Initial investment (Cfo) $25,000 $12,000 $17,000 Year 1 $8,250 $4,250 $7,500 2 $8,250 $4,250 $7,500 3 $8,250 $4,250 $7,500 4 $8,250 $4,250 $7,500 Risk Index (RI) 1.80 1.00 0.60 a - Find the net present value (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, RADR for each project: where RADR = Rf + [Ri x (r-Rf)] Rf risk-free rate of return Rij risk index for project j r cost of capital Substitute each project's risk index into this equation to determine irs RADR. c - Use 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?

Reference no: EM131010141

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Considering investing in mutually exclusive projects : Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F and G. The firm's cost of capital, r, is 15%, and the risk free rate (Rf) is 10%. The firm has gathered the following basic cash flow and risk index data fo..

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