Question

In: Finance

Year                          A               &nbs

Year                          A                          B

                0                              -75,000                  -75,000

                1                              40,000                 10,000

                2                              27,000                 15,200

                3                              20,000                 67,967

By how much should the cost of capital (discount rate) for the losing project (based on NPV) be increased or decreased in order for it to be selected over the winning project (based on NPV)?

Solutions

Expert Solution

Assuming initial cost of capital to be 5% for both projects.

So , NPV of Project B > Project A

Using Solver in excel, we get

So ,the cost of capital has to be increased by 3.30% ( New Cost of capital is 8.30%) to consider the decision such that NPV of project A > NPV of project B

Formulae

jeff jeffy answered 1 year ago
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