AMZ Corporation has two potential projects in which it can invest. Both cost $50,000. The expected income streams from these projects are found in the tables below. The risks of both projects are similar to the risks of current company projects. The current risk-free rate is 3% and the market is expected to return 7.5% per year. The company's beta is 2.0. The company will be raising all the $50,000 in debt and expects to pay 6.0% for it. The target capital structure for the company is 60% equity and 40% debt. The marginal tax rate is 35%.
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Project A Project B
16,500 8,800
14,500 10,800
12,500 12,800
11,500 15,800
8,500 17,800
a)What is the firm's weighted average cost of capital?
b) Which rate should the company use to discount capital projects (such as NPV) in this case?