Question

A/ You have calculated the NPV of two mutually exclusive alternative project cashflows. Project A seems to be the clear winner with a higher NPV than Project B. But your boss is concerned that Project A has exposure to higher risk levels than does Project B and wants you to include a 2% risk premium in calculating the NPV of Project A. What effect will this have on Project A's NPV?

B/You are evaluating a project cashflow that will extend over 17 years. Your normal discount rate for projects like this is 4%, but economists are predicting an average inflation rate of 3% for the next 15+ years. You want to address inflation risk using a risk premium. What discount rate will you use in calculating the NPV of your project?