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Safari File Edit View History Bookmarks Window Help 8 ) 9% CO Mon 12:14 AM Q : www.mathxl.com/Student/PlayerTest.aspx?testld-164987533&centerwin; yes Take a Quz/T BA 303 Fall 2017 Allenson Gepford | 11/27/17 12:13 AM BA 303 Fall 2017 Quiz: Quiz 9 Chapters 9 and 12 Problems Time Remaining: 02:29:14 Submit Quiz 9.43 AM 2017-10. 9.09 Take a Quiz/Test 1:00pm Stoc This Question: 10 pts | 7 of 8 (0 complete) This Quiz: 40 pts possible 11/20/17 Screen Shot 2017-10..9.58 AM 12:00pm 11/20/17 2:00pm 11/20/17 12:00pm 1/20/17 Sh Risk-adjusted discount rates Basic Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm's cost of capital, r. is 15.0%, and the risk-free rate, RF. is 10.0%. The firm has gathered the following basic cash flow and risk index data for each project G Prob a. Find the net present value (NPV) of each project using the firm's cost of capital. Which project is preferred in this situation? b. The fim uses the following equation to determine the risk-adjusted discount rate, RADR, for each project i DR+Rx(R) Microsoft Office 016 15.2aller.p where Rf risk-free rate of return, R risk index for projectj, andr cost of capital. c. Use the RADR for each oroiact to datermine its risk-adiusted NPV Which amiect is oreferable in this situatian? a. Find the net present value (NPV) of each project using the firm's cost of capital 12:00pm (Round to the nearest cent.) (Round to the nearest cent.) (Round to the nears t cant.) Shot 0.01AM The net present value for project E is $ - 11/27/17 12:00pm and The net present value for project F is $ ThA net nrasant value fr nniect G is S. 11/27/17 12:00pm and Enter your answer in each of the answer boxes. Shot 0.05 AM 2017-10...0.30 AM Screen Shot 12/18/17 12:00pm Shor 12/18/17 Final Test 12:00pm 90min0 of o Problems Practice 1 27

Explanation / Answer

COUNTRY WALL PAPERS: a) PROJECT E: YEAR CASH FLOWS 0 -15000 1 6000 2 6000 3 6000 4 6000 NPV= 6000*(1.15^4-1)/(0.15*1.15^4)-15000 = $       2,129.87 PROJECT F: YEAR CASH FLOWS PVIF AT 15% PV AT 15% 0 -11000 1 -11000.00 1 6000 0.86957 5217.39 2 4000 0.75614 3024.57 3 5000 0.65752 3287.58 4 2000 0.57175 1143.51 NPV = 1673.05 PROJECT G: YEAR CASH FLOWS PVIF AT 15% PV AT 15% 0 -19000 1 -19000.00 1 4000 0.86957 3478.26 2 6000 0.75614 4536.86 3 8000 0.65752 5260.13 4 12000 0.57175 6861.04 NPV = 1136.29 PREFERENCE: PROJECT E which has the highest NPV. b) RADR: Project E = 10+1.8*(15-10) = 19.00 % Project F = 10+1.0*(15-10) = 15.00 % Project G = 10+0.6*(15-10) = 13.00 % c) PROJECT E: YEAR CASH FLOWS 0 -15100 1 6100 2 6100 3 6100 4 6100 NPV= 6000*(1.19^4-1)/(0.19*1.19^4)-15000 = $           831.51 PROJECT F: YEAR CASH FLOWS PVIF AT 15% PV AT 15% 0 -11000 1 -11000.00 1 6000 0.86957 5217.39 2 4000 0.75614 3024.57 3 5000 0.65752 3287.58 4 2000 0.57175 1143.51 NPV = 1673.05 PROJECT G: YEAR CASH FLOWS PVIF AT 13% PV AT 13% 0 -19000 1 -19000.00 1 4000 0.88496 3539.82 2 6000 0.78315 4698.88 3 8000 0.69305 5544.40 4 12000 0.61332 7359.82 NPV = 2142.93 PREFERENCE: PROJECT G which has the highest NPV. d) In Part [a] the same discount rate was used assuming that the projects had the same risk as the existing projects of the firm. In Part [c], each project's cash flows were discounted with a risk adjusted discount rate approriate to its risk, which is fair. Hence, Project G should be preferred as it has the highest NPV when discounted with RADR.

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