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A firm's weighted average cost of capital is 11%. It is now considering a project that involves less risk than a typical project it undertakes.
A firm's weighted average cost of capital is 11%. It is now considering a project that involves less risk than a typical project it undertakes. When setting discount rates for new projects, the firm's management can adjust the discount rate used (relative to WACC) by 1 percentage point up or down. Evaluated at a discount rate of 10%, the project would have an NPV of $2,000,000. Evaluated at a discount rate of 11%, the project would have an NPV of $0. Evaluated at a discount rate of 12%, the project would have an NPV of -$1, 500,000. Should the firm pursue this project? Please explain your answer (no reasoning means no credit)
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