B. To justify each investment alternative, the company must have a certainty equivalent adjustment factor of at least aX = 0.777 for project X, aY = 0.658 for project Y, and aZ = 0.632 for project Z, because:

Certain Sum

Expected Risky Sum Investment Outlay (opportunity cost) Present Value CFAT

Project X

Project Y

Project Z

In other words, each risky dollar of expected profit contribution from project X must be "worth" at least (valued as highly as) 77.7tf in certain dollars to justify investment. For project Y, each risky dollar must be worth at least 65.8tf in certain dollars; each risky dollar must be worth at least 63.2tf to justify investment in project Z.

C. Given managerial risk aversion, project X is the least attractive investment because it has the highest "price" on each risky dollar of expected CFAT. In adopting projects Y and Z, MacKenzie-Rabb implicitly asserted that it is willing to pay between 63.2^ (project Z) and 65.8tf (project Y) per each expected dollar of CFAT.

D. No. If the prices described previously represent the maximum price the company is willing to pay for such risky returns, then project X should not be undertaken.

ST14.2 Project Valuation. Quality Foods, Inc., is a leading grocery retailer in the greater Washington, DC, metropolitan area. The company is currently engaged in an aggressive store refurbishing program and is contemplating expansion of its in-store delicatessen department. A number of investment alternatives are being considered, including the construction of facilities for a new

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