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​)	$ 23 comma 000$23,000	$ 28 comma 000$28,000
Project life	77 years	77 years
Annual cash inflow ​(CF nbspCF ​)	$ 7 comma 200$7,200	$ 10 comma 300$10,300
Risk index	0.20.2	1.41.4

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

​$nothing .

  ​(Round to the nearest​ cent.)

Risk index	Required return​ (RADR)
0.0	7.5 %7.5% ​(risk-free rate, Upper R Subscript Upper FRF​)
0.2	8.68.6
0.4	9.79.7
0.6	10.810.8
0.8	11.911.9
1.0	13.013.0
1.2	14.114.1
1.4	15.215.2
1.6	16.316.3
1.8	17.417.4
2.0	18.518.5

Answer 1