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Risk-adjusted NPV

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Risk-Adjusted NPV

Real Time Systems Inc. is considering the development of one of two mutually exclusive new computer models. Each will require a net investment of $5000. the cash flow figures for each project are shown below:

Period Project A Project B
1 $2,000 $3,000
2 $2,500 $2,600
3 $2,250 $2,900

Model B, which will use a new type of laser disk drive, is considered a high-risk project, which Model A is of average risk. Real Time adds 2 percentage points to arrive at a risk-adjusted cost of capital when evaluating a high-risk project. The cost of capital used for average-risk projects is 10%. What is the NPVs for Model A and B?

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The solution explains how to calculate the the risk-adjusted NPV.

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