Question

A firm is considering two projects, A and B. Each project will last for 4 years. The projected cash flows for each project are shown below:

Year	0	1	2	3	4
Project A	-20	8	7	6	4
Project B	-30	10	9	10	7

If the projects are contingent, for what range of WACC would you accept BOTH projects?

Answer 1

We would accept the projects if their NPV is positive. To find the WACC we will first calculate IRR and we will accept the projects if thr WACC of the projects are less than IRR.

We will use a BA 2 Plus Financial calculator to find the IRR-

Project A

Cf0- -20

Cf1- 8

Cf2- 7

Cf3- 6

Cf4- 4

CMPT IRR

IRR = 10.76%

We will accept this project if the IRR ranges from 0 to 10.76%

Project B

Cf0- -30

Cf1- 10

Cf2- 9

Cf3- 10

Cf4- 7

CMPT IRR

IRR = 8.0921

We will accept Project B if it's WACC ranges from 0 to 8.0921%

And we will accept both the projects if the WACC ranges from 0 to 8.0921%