Which element of the basic NPV equation is adjusted by the RADR?

The correct answer is: C. Both A and B

The RADR (Risk-Adjusted Discount Rate) is a discount rate that is used to calculate the present value of future cash flows. It is adjusted for the risk of the investment. The higher the risk, the higher the RADR.

The NPV (Net Present Value) equation is:

NPV = $\sum_{t=0}^{n} \frac{CF_t}{(1+r)^t}$

where:

• $CF_t$ is the cash flow in period $t$
• $r$ is the discount rate
• $n$ is the number of periods

The RADR is used to calculate the discount rate, $r$. Therefore, both the numerator and denominator of the NPV equation are adjusted by the RADR.

Here is a brief explanation of each option:

• Option A: The denominator of the NPV equation is the present value factor. The present value factor is calculated using the discount rate. Therefore, the denominator of the NPV equation is adjusted by the RADR.
• Option B: The numerator of the NPV equation is the sum of the future cash flows. The future cash flows are discounted using the discount rate. Therefore, the numerator of the NPV equation is adjusted by the RADR.
• Option C: Both the numerator and denominator of the NPV equation are adjusted by the RADR. This is because the RADR is used to calculate the discount rate, $r$.
• Option D: None of these. The RADR is used to calculate the discount rate, $r$. Therefore, both the numerator and denominator of the NPV equation are adjusted by the RADR.