Centennial Catering Inc. (CCI) is considering two mutually exclusive investments. It wishes to use two different evaluat

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Centennial Catering Inc. (CCI) is considering two mutually
exclusive investments. It wishes to
use two different evaluation methods – Certainty Equivalents
(CE) and Risk-adjusted rate of
return (RADR - CAPM) model. The cost of capital for CCI is 12%
and the current risk-free rate
is 7%. Cashflows associated with the two projects are as
follows.
A) Use the Certainty Equivalent approach to
calculate the Net Present Value of the projects
given the following CE factors.
B) Use the Risk-adjusted Rate of return
approach to calculate the NPV of each project given the project A
had a risk index (R1) of 1.20 and Project B has a rish index of
1.40. USe the following equation to calculate the required project
return for each:
Kj= RF+ [ RI x (Ka- RF)]
C)Explain why the results of the two approaches
may differ from one another. Which project would you choose?
Why