Now, suppose that two companies are looking at the same project. Company “A” has a beta of 1.5 and a cost of capital of 25%. Company “B” has a beta of 0.8 and a cost of capital of 15%. When evaluated at a rate of 15%, the project shows an NPV of +$5 million, and when evaluated at a rate of 25%, the project shows an NPV of -$2 million. Should either company accept the project, and if so, under what conditions?
Please explain your reasoning of how you came to the conclusion that you did
Answer:
We have been provided with the information as follow
| Company A | Company B | |
| Beta | 1.5 | 0.8 |
| cost of capital | 25% | 15% |
Here ,we can see that When evaluated at a rate of 15%, the project shows an NPV of +$5 million, and when evaluated at a rate of 25%, the project shows an NPV of -$2 million which clearly mean that company B should accept the project because it has lower Beta as well as lower cost of capital which matches the return of the project so company B should accept the project
Here company A can only accept the project it its beta and cost of capital are getting lower line
