An analyst working for Wheelz Ltd has proposed that as the firm is only financed with equity and all of the firm's projects have the same level of risk, the cost of equity capital should be used as the discount rate in NPV analysis. The analyst has estimated that the returns on Wheelz Ltd's stocks have a standard deviation of 25% per annum while the market portfolio returns have an expected standard deviation of 16% p.a. The covariance between the returns of Wheelz Ltd stocks and the market is 3.84%. The risk-free rate is 4% p.a. and the expected return on the equity market portfolio is 14%.

a.Use the CAPM to calculate Wheelz Ltd's cost of equity capital.

b.Using the cost of equity capital as the discount rate for cash flows, re-calculate the one-life NPV for both projects and evaluate the projects if they are mutually exclusive.

c.Discuss any reasons why your results from the NPV analysis using the cost of equity capital might be different from your analysis where the discount rate was assumed to be 15%.