Question: ABC Appliance Company uses the CAPM to determine its risk-adjusted discount rate, (RADR), for each of its projects:
Rj = RF + [b * (rm - RF)]
The company is currently interested in investing in the capital project shown below. The return on market is 9.65%, the risk-free rate is currently 8% and the project has a beta of 2.5.
Initial Investment
($3,900,000)
Year Cash Inflow
1 1,500,000
2 1,750,000
3 2,500,000
A. Using the CAPM compute the RADR
B. Compute the Risk-Adjusted NPV of the project.