Risk-adjusted rates of return using CAPM Centennial Catering, Inc., is considering two mutually exclusive investments. The company wishes to use a riskadjusted rate of return in its analysis. Centennial’s cost of capital (similar to the market return in CAPM) is 12%, and the current risk-free rate of return is 7%. Cash flows associated with the two projects are as follows:
Â
Project X
Project Y
Initial investment (CF0)
$70,000
$78,000
Year (t)
Cash inflows (CFt)
1
$30,000
$22,000
2
30,000
32,000
3
38,000
4
46,000
a. Use a risk-adjusted rate of return approach to calculate the net present value of each project, given that Project X has a RADR factor of 1.20 and Project Y has a RADR factor of 1.40. The RADR factors are similar to project betas. (Use Equation 10.5 to calculate the required project return for each.)
b. Discuss your findings in part a, and recommend the preferred project.
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