Question

Red Royal Consulting has a weighted-average cost of capital of 8.51 percent and is evaluating two projects: A and B. Project A involves an initial investment of 4,527 dollars and an expected cash flow of 6,700 dollars in 6 years. Project A is considered more risky than an average-risk project at Red Royal Consulting, such that the appropriate discount rate for it is 1.24 percentage points different than the discount rate used for an average-risk project at Red Royal Consulting. The internal rate of return for project A is 6.75 percent. Project B involves an initial investment of 5,626 dollars and an expected cash flow of 8,383 dollars in 7 years. Project B is considered less risky than an average-risk project at Red Royal Consulting, such that the appropriate discount rate for it is 1.62 percentage points different than the discount rate used for an average-risk project at Red Royal Consulting. The internal rate of return for project B is 5.86 percent. What is X if X equals the NPV of project A plus the NPV of project B?

Answer 1

NPV of Project A plus NPV of Project B
=-4527+6700/(1+8.51%+1.24%)^6-5626+8383/(1+8.51%-1.62%)^7
=-1060.8053