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Zeina Co. is considering investment in one of two mutually exclusive projects X and Y...

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Accounting

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Zeina Co. is considering investment in one of two mutually exclusive projects X and Y which are described below. Zeina Co. 's overall cost of capital is 15 %, the market return is 15 % and the risk-free rate is 5%. Zeina Co. estimates that the beta for project X is 1.20 and the beta for project Y is 1.40. Project X Project Y Initial Investment (CF) (EGP000) Year EGP 3,500 EGP 3,900 Cash Inflows (CF) (EGP000) EGP 1,500 EGP 1,100 1,500 1,600 2 1,500 1,900 1,500 2,300 Required a) Calculate the risk-adjusted discount rates for project X and project Y b) Using the risk-adjusted discount rate method of project evaluation, find the NPV for projects X and Y. Which project should Zeina Co. select using this method? c) Calculate the NPV of projects X and Y assuming that the firm did not employ the RADR method and instead used the firm's overall cost of capital to evaluate projects X and Y. d) What potential biases exist in project selection if Zeina Co. did not adjust for the difference in risk between projects X and Y

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