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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?
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