APL has an overall cost of capital of 11.6 percent and a beta of 1.31.The firm is contemplating a new project that is unrelated to the firm's current operations.SKL is a firm that operates similarly to the new project and SKL has a cost of capital of 10.7 percent.APL knows that it will be less efficient than SKL and thus feels that an adjustment of +1 percent should be added to the project's discount rate to allow for this inefficiency.What discount rate should be assigned to the new project?

Question

Quizplus · Accepted Answer

To calculate the discount rate for the new project, we need to add a premium to SKL's cost of capital because APL expects to be less efficient than SKL in operating the new project. The premium is given as +1 percent, so we need to add this to SKL's cost of capital of 10.7 percent.

Discount rate for the new project = SKL's cost of capital + premium 
Discount rate for the new project = 10.7% + 1% 
Discount rate for the new project = 11.7%

Therefore, the best choice is C) 11.7 percent.

APL Has an Overall Cost of Capital of 11