Polycorp is investigating two projects. The risk-free rate is 3% pa and the market return is 8%pa.
Question:
Polycorp is investigating two projects. The risk-free rate is 3% pa and the market return is 8%pa. Project A has a beta of .7 and Project B has beta of 1.6. The projects are independent. If accepted the projects will initially be funded by borrowing at 5%pa. The relevant net cash flows for each project are below. The firm's current weighted average cost of capital is 11% pa (before taking either or both A and B). Assume no taxes. Calculate the NPV of each project and indicate which project or projects should be accepted/rejected. Explain your choice of the discount rate and your adjustment for risk.
Year 0 1 2
A). (10000) 5300 7400
B). (15000) 8700 9500
Fundamentals of Investing
ISBN: 978-0133075359
12th edition
Authors: Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk