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A firm is considering investment in a capital project which is described below. The firm's cost of capital is 18 percent and the risk-free 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 x (Cost of capital - Rf)

Initial Investment $1,000,000

Year Cash Inflow

1 $500,000

2 $500,000

3 $500,000

The net present value without adjusting the discount rate for risk is ?

The discount rate that should be used in the net present value calculation to compensate for risk is ?

The net present value of the project when adjusting for risk is

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91728945

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