Question

Silver Sun Industrial has a weighted-average cost of capital of 11.42 percent and is evaluating two projects: A and B. Project A involves an initial investment of 4,842 dollars and an expected cash flow of 8,958 dollars in 4 years. Project A is considered more risky than an average-risk project at Silver Sun Industrial, such that the appropriate discount rate for it is 2.15 percentage points different than the discount rate used for an average-risk project at Silver Sun Industrial. The internal rate of return for project A is 16.63 percent. Project B involves an initial investment of 4,141 dollars and an expected cash flow of 5,880 dollars in 9 years. Project B is considered less risky than an average-risk project at Silver Sun Industrial, such that the appropriate discount rate for it is 1.72 percentage points different than the discount rate used for an average-risk project at Silver Sun Industrial. The internal rate of return for project B is 3.97 percent. What is X if X equals the NPV of project A plus the NPV of project B?

Answer #1

Silver Sun's WACC = 11.42%

Because project A is more risky, the discount rate for it will be higher than Silver Sun's wacc. And because project B is less risky, the discount rate will be lower for it.

Project A's discount rate = 11.42+2.15 = 13.57%

Project B's discount rate = 11.42-1.72 = 9.70%

Project A's Npv = -4842+8958/(1.1357)^4 = 542.64

Project B's Npv= -4141+5880/(1.097)^9 = -1585.25

Thwrei, the combined npv of both projects =

-1585.25+542.64 = - 1042.61

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