Gallant Guitars is considering several possible projects; each project requires an outlay of $2,000,000 and yields an indefinite stream of cash flow. The projects differ in the level of riskiness (i.e., the certainty of future cash flows varies). After investigating this issue, management has learned that each project has the same NPV and, accordingly, the managers are indifferent concerning which project to pursue.

The discount rate for project A is 7.5 percent.
Required:
1. What is the discount rate necessary for projects B, C, and D such that the NPVs of all projects are equal?
2. What is the difference between the discount rates for projects B, C and D, and the discount rate for project A?
3. How can this difference be interpreted?
4. Which project would you choose to pursue? Why?
5. What variety of factors influenced your decision?

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Investment Years of Cash Flow Cash Flow Project Risk-Level No Risk Low Risk Medium Risk High Risk A B в $2,000,000 $150,000 Indefinite Indefinite 2,000,000 2,000,000 350,000 450,000 Indefinite D Indefinite