Risk classes and RADR Moses Manufacturing is attempting to select the best of three mutually exclusive projects, X, Y, and Z. Although all the projects have 5-year
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Get it written →Risk classes and RADR Moses Manufacturing is attempting to select the best of three mutually exclusive projects, X, Y, and Z. Although all the projects have 5-year
lives, they possess differing degrees of risk. Project X is in class V, the highest-risk class; project Y is in class II, the below-average-risk class; and project Z is in class III, the average-risk class. The basic cash flow data for each project and the risk classes and risk-adjusted discount rates (RADRs) used by the firm are shown in the following tables
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Initial investment (CF0)
$184,000
$240,000
$307,000
Year (t )
Cash inflows (CFt)
1
$83,000
$52,000
$95,000
2
66,000
63,000
95,000
3
65,000
75,000
95,000
4
63,000
89,000
95,000
5
63,000
93,000
95,000
Risk Classes and RADRs
Risk Class
Description
Risk adjusted discount rate (RADR)
I
Lowest risk
10.7%
II
Below-average risk
13.5
III
Average risk
15.4
IV
Above-average risk
19.5
V
Highest risk
22.3
.
a. Find the risk-adjusted NPV for each project.
b. Which project, if any, would you recommend that the firm undertake?
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