Fairfax Pizza has a weighted-average cost of capital of 7.14 percent and is eval

Question

Fairfax Pizza has a weighted-average cost of capital of 7.14 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 5,399 dollars today and an expected cash flow of 8,422 dollars in 2 years. Project A is considered more risky than an average-risk project at Fairfax Pizza, such that the appropriate discount rate for it is 2.03 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 24.897 percent. Project B has an initial investment of 5,739 dollars today and an expected cash flow of 8,035 dollars in 5 years. Project B is considered less risky than an average-risk project at Fairfax Pizza, such that the appropriate discount rate for it is 1.03 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 6.962 percent.

Explanation / Answer

Project A Discount Factor= 9.17% Project B Discount Factor= 6.11% Year 0 1 2 3 Project A Amount -5399 0 8422 Project B Amount -5739 0 0 0 0 8035 NPV A $1,527.50 NPV B $220.68 NPV (A+B) $1,748.18

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