Bell Manufacturing is considering investment in one of two mutually exclusive projects X and Y which are described below. Bell Manufacturing’s overall cost of capital is 5 percent, the market return is 9 percent and the risk-free rate is 1 percent. Bell estimates that the beta for project X is 1.20 and the beta for project Y is 1.40. The firm uses the following equation to determine the risk adjusted discount rate, RADR, for each project: RADR = Rf + beta x (Market Return – Rf) – Looks familiar…hmm….maybe CAPM?
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