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    Risk adjusted discount rate

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    A business is considering an investment in one of two mutually exclusive projects. The discount rate used for Project A is 12%. Futher, Project A cost 15K and it would be depreciated using MACRS. It is expected to have an after-tax salvage value of 5K at the end of 6 years and to produce after-tax cash flows (including a depreciation) of 4K for each of the 6 years.

    Project B costs 14,815 and would also be depreciated using MACRS. B is expected to have a zero salvage value at the end of its 6-year life and to produce after-tax cash flows (including depreciation) of $5,100 each year for 6 years. The companys marginal tax rate is 40%. What risk-adjusted discount rate will equate the NPV of project B to that of Project A

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    Solution Preview

    A business is considering an investment in one of two mutually exclusive projects. The discount rate used for Project A is 12%. Futher, Project A cost 15K and it would be depreciated using ...

    Solution Summary

    This explains the Risk adjusted discount rate will equate the NPV or both projects

    $2.19

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