Risk classes and RADR ??Moses Manufacturing is attempting to select the best of three mutually exclusive?...

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Finance

Risk classes and RADR ??Moses Manufacturing is attempting toselect the best of three mutually exclusive? projects, X,? Y, andZ. Although all the projects have
55?-year
?lives, they possess differing degrees of risk. Project X is inclass?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 andthe risk classes and? risk-adjusted discount rates? (RADRs) used bythe firm are shown in the following tables
LOADING...
.
a. Find the ?risk-adjusted NPV for each project.
b. Which? project, if? any, would you recommend that the firm?undertake?
Project X
Project Y
Project Z
Initial investment
?(CF 0CF0?)
?$177 comma 000177,000
?$239 comma 000239,000
?$305 comma 000305,000
Year
?(tt ?)
Cash inflows
?(CF Subscript tCFt?)
1
?$85 comma 00085,000
?$59 comma 00059,000
?$92 comma 00092,000
2
??67 comma 00067,000
??65 comma 00065,000
??92 comma 00092,000
3
??61 comma 00061,000
??76 comma 00076,000
??92 comma 00092,000
4
??63 comma 00063,000
??83 comma 00083,000
??92 comma 00092,000
5
??58 comma 00058,000
??91 comma 00091,000
??92 comma 00092,000
Risk Classes and RADRs
Risk Class
Description
Risk adjusted discount rate? (RADR)
I
Lowest risk
10.7 %
II
?Below-average risk
13.8
III
Average risk
15.7
IV
?Above-average risk
19.6
V
Highest risk
22.7

Answer & Explanation Solved by verified expert

3.7 Ratings (469 Votes)

1Project XYearcash flowpresent value of cash flow cash flow1rn r 227present value of cash flow cash flow1rn r See Answer

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Transcribed Image Text

Risk classes and RADR ??Moses Manufacturing is attempting toselect the best of three mutually exclusive? projects, X,? Y, andZ. Although all the projects have55?-year?lives, they possess differing degrees of risk. Project X is inclass?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 andthe risk classes and? risk-adjusted discount rates? (RADRs) used bythe firm are shown in the following tablesLOADING....a. Find the ?risk-adjusted NPV for each project.b. Which? project, if? any, would you recommend that the firm?undertake?Project XProject YProject ZInitial investment?(CF 0CF0?)?$177 comma 000177,000?$239 comma 000239,000?$305 comma 000305,000Year?(tt ?)Cash inflows?(CF Subscript tCFt?)1?$85 comma 00085,000?$59 comma 00059,000?$92 comma 00092,0002??67 comma 00067,000??65 comma 00065,000??92 comma 00092,0003??61 comma 00061,000??76 comma 00076,000??92 comma 00092,0004??63 comma 00063,000??83 comma 00083,000??92 comma 00092,0005??58 comma 00058,000??91 comma 00091,000??92 comma 00092,000Risk Classes and RADRsRisk ClassDescriptionRisk adjusted discount rate? (RADR)ILowest risk10.7 %II?Below-average risk13.8IIIAverage risk15.7IV?Above-average risk19.6VHighest risk22.7

Project X	Project Y	Project Z
Initial investment ?(CF 0CF0?)	?$177 comma 000177,000	?$239 comma 000239,000	?$305 comma 000305,000
Year ?(tt ?)	Cash inflows ?(CF Subscript tCFt?)
1	?$85 comma 00085,000	?$59 comma 00059,000	?$92 comma 00092,000
2	??67 comma 00067,000	??65 comma 00065,000	??92 comma 00092,000
3	??61 comma 00061,000	??76 comma 00076,000	??92 comma 00092,000
4	??63 comma 00063,000	??83 comma 00083,000	??92 comma 00092,000
5	??58 comma 00058,000	??91 comma 00091,000	??92 comma 00092,000

Risk Classes and RADRs
Risk Class	Description	Risk adjusted discount rate? (RADR)
I	Lowest risk	10.7 %
II	?Below-average risk	13.8
III	Average risk	15.7
IV	?Above-average risk	19.6
V	Highest risk	22.7