Question

Given that Attatiki Food Co. has a policy of risk adjusting their WACC of 12% by plus or minus 3% for above and below-average risk projects respectively, which of the following independent projects are accepted using NPV?

Project:	A	B	C
Risk	Average	Below	Above
CF0	-10	-20	-25
CF1	5	10	5
CF2	5	10	5
CF3	4	7	10
CF4	4	3	20
	Go / No Go	Go / No Go	Go / No Go
NPV	________	________	________

Answer 1

Answer:

For average risk projects, WACC will be 12%
For above average risk projects, WACC will be 15% (12+3)
For below average risk projects, WACC will be 9% (12-3)

AVERAGE RISK PROJECT

Year	Cash Flows	PV @ 12%	Discounted Cash flows
1	5	0.8929	4.4645
2	5	0.7972	3.9860
3	4	0.7112	2.8448
4	4	0.6355	2.5420
			13.8373
		Less: Initial investment	10
		NPV	3.8373

Since, NPV is positive, the project should be accepted.

BELOW RISK PROJECT

Year	Cash Flows	PV @ 9%	Discounted Cash flows
1	10	0.9174	9.1740
2	10	0.8417	8.4170
3	7	0.7722	5.4054
4	3	0.7084	2.1252
			25.1216
		Less: Initial investment	20
		NPV	5.1216

Since, NPV is positive, the project should be accepted.

ABOVE RISK PROJECT

Year	Cash Flows	PV @ 15%	Discounted Cash flows
1	5	0.8696	4.3480
2	5	0.7561	3.7805
3	10	0.6575	6.5750
4	20	0.5717	11.4340
			26.1375
		Less: Initial investment	25
		NPV	1.1375

Since, NPV is positive, the project should be accepted.