Question

Yellow Sand Industrial has a weighted-average cost of capital of 8.44 percent and is evaluating two projects: A and B. Project A involves an initial investment of 4,262 dollars and an expected cash flow of 7,799 dollars in 2 years. Project A is considered more risky than an average-risk project at Yellow Sand Industrial, such that the appropriate discount rate for it is 1.58 percentage points different than the discount rate used for an average-risk project at Yellow Sand Industrial. The internal rate of return for project A is 35.27 percent. Project B involves an initial investment of 6,735 dollars and an expected cash flow of 11,315 dollars in 5 years. Project B is considered less risky than an average-risk project at Yellow Sand Industrial, such that the appropriate discount rate for it is 1.74 percentage points different than the discount rate used for an average-risk project at Yellow Sand Industrial. The internal rate of return for project B is 10.93 percent. What is X if X equals the NPV of project A plus the NPV of project B?

Answer 1

Year	0	1	2	3	4	5
A	-4,262	-	7,799	-	-	-
Discount rate	10.02%
NPV	₹ 6,443.11
B	-6,735	-	-	-	-	11,315
Discount rate	6.70%
NPV	8,181
Total	₹ 14,624.60

Discount Rate for A since its more risk than average would be 8.44%+ 1.58%= 10.02%

Discount Rate for A since its less risk than average would be 8.44%- 1.74%= 6.70%

Based on discount rate NPV A+ NPV B= 14624