Risk classes and RADR Moses Manufacturing is attempting to select the best of 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 V, the highest-risk class; project Y is in class II, the
below-average-risk dass, and project Z is in class III, the average-risk class. The basic cash flow data for each project and the risk dasses and risk-adjusted discount rales (RADRs) used by the firm are shown in the following tables
a. Find the risk-adjusted NPV for each project.
b. Which project, if any, would you recommend that the firm undertake?
The net present value for project X is S (Round to the nearest cent)
1 Data Table
X
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Initial investment (CFO)
Year (1)
Project X
Project Y
Project Z
$178.000
$237,000
$313,000
Cash inflows (CF$_t$)
$80.000
$60,000
$88.000
73.000
70,000
88,000
60,000
71,000
88,000
63,000
80,000
88,000
65.000
99,000
88.000
Risk Class
Description
Risk Classes and RADRs
Risk adjusted discount rate (RADR)
Lowest risk
10.4%
Below-average risk
13.3
Average risk
15.4
IV
Above average risk
19.5
Highest risk
22.4
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