Accounts & Finance

"To solve this problem, we'll follow these steps:

Calculate the NPV of each project using the firm's cost of capital (r = 10%).

Calculate the Risk-Adjusted Discount Rate (RADR) for each project using the given formula and beta values.

Calculate the Risk-Adjusted NPV for each project using the RADR.

Compare the NPVs calculated using the firm's cost of capital with those calculated using RADR to determine the preferable project.

Let's start with the calculations:

Given data:

Cost of capital (r) = 10%

Risk-free rate (RF) = 20%

Comparing NPVs calculated using the firm's cost of capital and the risk-adjusted NPVs, we see that:

For Project E:

NPV using firm's cost of capital: $4,545.45

Risk-Adjusted NPV: $4,464.29

For Project F:

NPV using firm's cost of capital: $6,363.64

Risk-Adjusted NPV: $6,481.48

For Project G:

NPV using firm's cost of capital: $7,272.73

Risk-Adjusted NPV: $7,619.05

Project G has the highest NPV both using the firm's cost of capital and the risk-adjusted NPV. Therefore, based on both calculations, Project G is recommended for the firm to accept."