Question

After a careful evaluation of investment alternatives and​ opportunities, Masters School Supplies has developed a​ CAPM-type relationship linking a risk index to the required return​ (RADR), as shown in the table

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.

The firm is considering two mutually exclusive​ projects, A and B. Following are the data the firm has been able to gather about the projects.

	Project A	Project B
Initial investment ​(CF 0CF0​)	$ 22 comma 000$22,000	$ 30 comma 000$30,000
Project life	77 years	77 years
Annual cash inflow ​(CF nbspCF ​)	$ 6 comma 000$6,000	$ 10 comma 900$10,900
Risk index	0.60.6	1.61.6

All the​ firm's cash flows for each project have already been adjusted for taxes.

a. Evaluate the projects using ​risk-adjusted discount

rates.

b. Discuss your findings in part

​(a​),

and recommend the preferred project.

a. The net present value for project A is

​$______

  ​(Round to the nearest​ cent.)

Risk index	Required return​ (RADR)
0.0	7.1 %7.1% ​(risk-free rate, Upper R Subscript Upper FRF​)
0.2	8.0
0.4	8.9
0.6	9.8
0.8	10.7
1.0	11.6
1.2	12.5
1.4	13.4
1.6	14.3
1.8	15.2
2.0	16.1

Answer 1

	X	Y
	Risk index	Required Return(Percent)
	0	7.1
	0.2	8
	0.4	8.9
	0.6	9.8
	0.8	10.7
	1	11.6
	1.2	12.5
	1.4	13.4
	1.6	14.3
	1.8	15.2
	2	16.1
	Use Regression tool of data analysis
	Click"Data", Click on "Data Analysis"
	Select "Regression"and click"OK"
	Input Y range "Required Return"
	Input X range "RiakIndex"
	Output:Intercept=7.1
	Output :X Variable1=4.5
	Required Return =7.1+4.5*RiskIndex
	Risk Index	Required Return
	0.606	9.83	(7.1+4.5*0.606)
	1.616	14.37	(7.1+4.5*1.616)
	Required Return of Project A	9.83%
	Required Return of Project B	14.37%
		Project A	Project B
Rate	Discount Rate =Required Return	9.83%	14.37%
Nper	Number of Years	77	77
Pmt	Annual Cash Flow	$6,000	$10,900
PV	Present Value of annual cash flow	$60,993	$75,850
	(Using PV function of excel)
I	Initial Cash Flow	($22,000)	($30,000)
NPV=PV+I	Net Present Value (NPV)	$38,993	$45,850
	Net Present Value of Project A	$38,993
	Net Present Value of Project B	$45,850
	Project B should be selected
	It has higher NPV