You are part of a team of financial analysts calculating the NPV for several potential new projects.
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Question:
You are part of a team of financial analysts calculating the NPV for several potential new projects. The only information available to you is the companys current WACC, including the values used to calculate WACC. You know that many of the new projects have a different beta than what was used to calculate WACC. You also know that the company is planning to finance the projects similar to their current financing mix. How would you proceed?
Select answer from the options below
Ask the team to calculate the market risk premium for each project, because that will influence beta. Once the correct beta is determined, it should be used as the discount rate for each project.
Ask the team to calculate a new WACC for each project based on the financing mix that the company will use to finance the project.
Use the companys current WACC to discount cash flows of each project, because that is the standard practice when calculating NPV for new projects.
Ask the team to develop a range of appropriate beta values for different project categories, then use the appropriate beta when calculating the discount rate for each project.
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