Question

24. You want to invest in a project in Canada that has an initial cost of C$812,000 and is expected to produce cash inflows of C$340,000 a year for three years. The project will be worthless after the three years. The risk-free rate in Canada is 4 percent while it is only 3 percent in the U.S. The applicable interest rate for the project in Canada is 12 percent. Assume the current spot rate is C$1 = $.7874. What is the WACC you should use if you want to evaluate the project using US cash flows? Please show your work. A) 10.92% B) 12% C) 13.09% D) 15% E) 16%

Answer 1

As we know that,

Discount rate of any project comprises of risk free rate and compensation for risk involved in project .

Here as given that risk free rate of Canada and US is different and we need to find out WACC or discount rate for US then we need to remove the risk free rate of Canada from its discount rate and include the risk free rate of US

Hence ,WACC for evaluating the project using US cash flows=

Hence correct answer is option (A)

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