A Firm Is Considering Investment in a Capital Project Which

question 29

Multiple Choice

A firm is considering investment in a capital project which is described below. The firm's cost of capital is 18 percent and the riskfree rate is 6 percent. The project has a risk index of 1.5. The firm uses the following equation to determine the risk adjusted discount rate, RADR, for each project: RADR = Rf + Risk Index (Cost of capital - Rf)
$$\begin{array} { l r } \text { Initial Investment } & \$ 1,000,000 \\\hline \text { Year } & \text { Cash Inflow } \\\hline 1 & \$ 500,000 \\2 & 500,000 \\3 & 500,000\end{array}$$
-The discount rate that should be used in the net present value calculation to compensate for risk is(See Figure 13.3)

• A) 24 percent.
• B) 18 percent.
• C) 15 percent.
• D) 6 percent.

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