In: Finance
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)?
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