Fairfax Pizza has a weighted-average cost of capital of 10.11 percent and is eva

Question

Fairfax Pizza has a weighted-average cost of capital of 10.11 percent and is evaluating two projects: A & B. What is The NPV of project A plus the NPV of project B? Project A has an initial investment of 6,767 dollars today and an expected cash flow of 12,248 dollars in 4 years. Project A is considered more risky than an average-risk project at Fairfax Pizza, such that the appropriate discount rate for it is 1.34 percentage points different than the discount rate used for an average-risk project at Fairfax Pizza. The internal rate of return for project A is 15.989 percent. Project B has an initial investment of 5,709 dollars today and an expected cash flow of 10,447 dollars in 9 years. Project B is considered less risky than an average-risk project at Fairfax Pizza, such that the appropriate discount rate for it is 2.16 percentage points different than the discount rate used for an average-risk project at Fairfax Pizza. The internal rate of return for project B is 6.945 percent.

Explanation / Answer

Since, cash flow is generated either annually or in last yeara is not given in question, so we assumed in the last year. Other assumptionmay also be taken.

Project-A Project-B Expected cash flow 12248 10447 Life (Years) 4 9 Cost of capital 11.45% 7.95% Cumulative discount factor 0.648 0.502 Present value of cash inflow 7939 5248 Less: Initial outlay 6767 5709 NPV 1172 -461

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.