Two mutually exclusive projects

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Reference no: EM132199971

Considering two mutually exclusive projects & using a risk adjusted rate (RADR) to help make decision.

We know:

Cost of capital (call this the market return (Rm) in CAPM) is 12%

Risk free rate (Rf) is 7%

Cash flows for each projects:

Project One                                     Project Two

Initial investment         $70,000                                                          $78,000

Inflows      Year 1             $30,000                                                          $22,000

            Year 2            $30,000                                                          $32,000

           Year 3             $30,000                                                          $38,000

           Year 4             $30,000                                                          $46,000

Risk factor (b)             1.2                                                       1.4

1) Use a risk adjusted interest rate (RADR) to calculate the NPV of each project

2) Which project will you go forward with?

Reference no: EM132199971

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