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12-11 Centennial Catering, Inc., is considering two mutually exclusive investments. The company wishes to use a CAPM-type risk-adjusted discount rate...

12-11

Centennial Catering, Inc., is considering two mutually exclusive investments. The company wishes to use a CAPM-type risk-adjusted discount rate (RADR) in its analysis. Centennial's managers believe that the appropriate market rate of return is 12%, and they observe that the current risk-free rate of return is 7%. Cash flows associated with the two projects are shown in the following table:

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A) Use a risk-adjusted discount rate approach to calculate the net present value of each project, given that project X has an RADR factor of 1.20 and project Y has an RADR factor of 1.40. The RADR factors are similar to project betas.

B) Discuss your findings in part a, and recommend the preferred project.

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Top Answer

a) NPV X = 19234.14 , NPV Y = 18805.82 b) Project X should be selected... View the full answer

NPV calculation X Y.JPG

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