Solution to Problems on APV and WACC

# Solution to Problems on APV and WACC - =.142.85 =.1207...

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Professor Kose John Solution to Problems on APV and WACC (a) a = 1.5, r a = r F + a (r m - r F ) = .07 + 1.5(.04) = .13 Accept Project. (b) r a = .07 + 3(.04) = 0.19 Since the required rate of return (adjusted cost of capital) is less than 18% the project should be accepted. Its NPV will be positive . (c) Given the ’s of the projects, the r a and the r a * for each project can be computed, as in (a) or (b). Process A r a = .07 + 1.8(.04) = .142 r a

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Unformatted text preview: = .142(.85) = .1207 Process B r a = .07 + 3.4 (.04) = .206 r a * = 0.206(1 - .5(.3)) =.1751 Since NPV(A) > NPV(B), accept project A 64 . 7 .1105 13 110-NPV 0.1105 .5(.3))-.13(1 V D t-1 r r a * a 0.1615 0.19(.85) .5(.3))-0.19(1 r * a 42.77 .1751 26.4 108-NPV(B) 50.13 0.1207 18 99-NPV(A)...
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