Question

Silver Sun Aviation has a weighted-average cost of capital of 8.64 percent and is evaluating two projects: A and B. Project A involves an initial investment of 6,389 dollars and an expected cash flow of 11,117 dollars in 6 years. Project A is considered more risky than an average-risk project at Silver Sun Aviation, such that the appropriate discount rate for it is 1.62 percentage points different than the discount rate used for an average-risk project at Silver Sun Aviation. The internal rate of return for project A is 9.67 percent. Project B involves an initial investment of 5,820 dollars and an expected cash flow of 8,730 dollars in 9 years. Project B is considered less risky than an average-risk project at Silver Sun Aviation, such that the appropriate discount rate for it is 2.13 percentage points different than the discount rate used for an average-risk project at Silver Sun Aviation. The internal rate of return for project B is 4.61 percent. What is X if X equals the NPV of project A plus the NPV of project B?

Answer 1

	Project A	Project B	Total
Future cash inflow	$          11,167	$            8,730
× discount factor A: 10.25%, 6yrs B: 6.51%, 9yrs	0.55684	0.56687
Present value of inflows	$       6,218.20	$       4,948.81
Less: investment	$     (6,389.00)	$     (5,820.00)
NPV	$        (170.80)	$        (871.19)	$(1,041.99)

Value of X is $(1,041.99)

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