Table 11.7
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 (Cost of capital - Rf)
-The discount rate that should be used in the net present value calculation to compensate for risk is ________.(See Table 11.7)

Question

Table 11.7
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 (Cost of capital - Rf) 
-The discount rate that should be used in the net present value calculation to compensate for risk is ________.(See Table 11.7)

Quizplus · Accepted Answer

Using the given equation, 
RADR = Rf + Risk Index (Cost of capital - Rf) 
RADR = 6% + 1.5 (18% - 6%) 
RADR = 6% + 1.5 (12%) 
RADR = 6% + 18% 
RADR = 24%

Therefore, the discount rate that should be used in the net present value calculation to compensate for risk is 24%. Option D is the correct answer.

Table 11.7 A Firm Is Considering Investment in a Capital Project Which