Question

6. The Mosco Manufacture is attempting to select the best three mutually exclusive projects, X, Y, and Z. Although all the projects have 5-year lives, they possess differing degrees of risk. Project X is in class of the highest risk class; project Y is the below-average-risk class; project Z is in class of the average-risk class. The basic cash flow data for each project are in follow table and the risk classes and risk-adjusted discount rate (RADR) used by the firm are below average is 13% , average risk is 15% and highest risk is 22%.

	Project X	Project Y	Project Z
Initial Investment	-180,000	-$235,000	-$310,000
Year (t)	Cash flows	Cash flows	Cash flow
1	80,000	50,000	90,000
2	70,000	60,000	90,000
3	60,000	70,000	90,000
4	60,000	80,000	90,000
5	60,000	90,000	90,000

a) Find the Risk-adjusted NPV for each

b) Which project, if any, would you recommend that the firm undertake

***Please Show Work. Don't Use Excel To Solve***

Answer 1

Answer:

Project X- Highest Risk class (22%)

Year	Cash Flows	PV @ 22%	Discounted Cash flows
1	80,000.00	0.820	65,600.00
2	70,000.00	0.672	47,040.00
3	60,000.00	0.551	33,060.00
4	60,000.00	0.451	27,060.00
5	60,000.00	0.370	22,200.00
			1,94,960.00
		Less: Initial Investment	1,80,000.00
		NPV	14,960.00

Project Y- Below Average Risk class (13%)

Year	Cash Flows	PV @ 13%	Discounted Cash flows
1	50,000.00	0.885	44,250.00
2	60,000.00	0.783	46,980.00
3	70,000.00	0.693	48,510.00
4	80,000.00	0.613	49,040.00
5	90,000.00	0.543	48,870.00
			2,37,650.00
		Less: Initial Investment	2,35,000.00
		NPV	2,650.00

Project Z- Average Risk class (15%)

Year	Cash Flows	PV @ 15%	Discounted Cash flows
1	90,000.00	0.870	78,300.00
2	90,000.00	0.756	68,040.00
3	90,000.00	0.658	59,220.00
4	90,000.00	0.572	51,480.00
5	90,000.00	0.497	44,730.00
			3,01,770.00
		Less: Initial Investment	3,10,000.00
		NPV	-8,230.00

Considering Risk- adjusted NPV of the three projects, Project X should be selected.