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%, and the risk-free rate, *RF*, is 10%. The firm has gathered the basic cash flow and risk index data for each project as shown in the table at the top of the next page.

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 firm uses the following equation to determine the risk-adjusted discount

rate, RADR*j*, for each project *j*:

*RADRj *= *RF *+ 3*RIj ** (*r *– *RF*) 4

where

*RF *= risk@free rate of return

*RIj *= risk index for project *j*

*r *= cost of capital

Substitute each project’s risk index into this equation to determine its RADR.

c. Use the RADR for each project to determine its *risk-adjusted NPV. *Which project

is preferable in this situation?

d. Compare and discuss your findings in parts a and c. Which project do you recommend

that the firm accept?