The Unlimited, a national retailing chain, is considering an investment in one of two mutually exclusive projects.The discount rate used for Project A is 12 percent.Further, Project A costs R15,000, and it would be depreciated using MACRS.It is expected to have an after-tax salvage value of R5,000 at the end of 6 years and to produce after-tax cash flows (including depreciation) of R4,000 for each of the 6 years.Project B costs R14,815 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 R5,100 each year for 6 years.The Unlimited's marginal tax rate is 40 percent.What risk-adjusted discount rate will equate the NPV of Project B to that of Project A?

Question

Quizplus · Accepted Answer

To equate the NPVs of both projects, we need to find the discount rate for Project B that makes its NPV equal to Project A's NPV at 12%. Calculating the NPVs and adjusting for the risk-adjusted rate, the correct rate is 16%.

The Unlimited, a National Retailing Chain, Is Considering an Investment