Question

Silver Sun Entertainment has a weighted-average cost of capital of 8.22 percent and is evaluating two projects: A and B. Project A involves an initial investment of 5,756 dollars and an expected cash flow of 8,519 dollars in 6 years. Project A is considered more risky than an average-risk project at Silver Sun Entertainment, such that the appropriate discount rate for it is 0.86 percentage points different than the discount rate used for an average-risk project at Silver Sun Entertainment. The internal rate of return for project A is 6.75 percent. Project B involves an initial investment of 4,760 dollars and an expected cash flow of 8,425 dollars in 5 years. Project B is considered less risky than an average-risk project at Silver Sun Entertainment, such that the appropriate discount rate for it is 1.78 percentage points different than the discount rate used for an average-risk project at Silver Sun Entertainment. The internal rate of return for project B is 12.1 percent. What is X if X equals the NPV of project A plus the NPV of project B?

Answer 1

X = $62676.93

Year	Project A	Project B
0	-5756	-4760
1	8519	8425
2	8519	8425
3	8519	8425
4	8519	8425
5	8519	8425
6	8519	0
Discount rate	0.0908	0.0644
NPV	$32,368.56	$30,308.37
X	$62,676.93

WORKINGS