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Risk-adjusted rates of return using CAPMCentennial Catering, Inc., is considering two mutually exclusive investments. The...

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Finance

Risk-adjusted rates of return using CAPMCentennial Catering, Inc., is considering two mutually exclusive investments. The company wishes to use a CAPM-type risk-adjusted discount rate (RADR) in its analysis. Centennial's managers believe that the appropriate market rate of return is 11.5%, and they observe that the current risk-free rate of return is 6.8%. Cash flows associated with the two projects are shown in the following table.(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.

Project X

Project Y
Initial investment

(CF0)

$70,000

$84,000
Year

(t )

 Cash inflows

(CFt)

1

$35,000

$19,000

2

35,000

35,000

3

35,000

40,000

4

35,000

49,000

a. Use a risk-adjusted discount rate approach to calculate the net present value of each project, given that project X has an RADR factor of 1.21and project Y has an RADR factor of 1.41. The RADR factors are similar to project betas. (Hint:Use the following equation to calculate the required project return for each: r=RF+brmRF.)

b. Discuss your findings in part (a),and recommend the preferred project.

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