Question: Polycorp is investigating two projects. The risk-free rate is 2% pa and the market premium is 6%pa. Project A has a beta of 8 and

Polycorp is investigating two projects. The risk-free rate is 2% pa and the market premium is 6%pa. Project A has a beta of 8 and project B has a beta of 1.8. The projects are independent. If accepted the project will initially be funded by borrowing at 6%pa. The relevant net cash flows for each project are below. The firm's current weight average cost of capital is 10%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 adjustment of risk.

year	0	1	2
A	(10000)	4300	8400
B	(15000)	7700	9900

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