Question
Red Royal Technology has a weighted-average cost of capital of 7.28 percent and is evaluating two projects: A and B. Project A involves an initial
Red Royal Technology has a weighted-average cost of capital of 7.28 percent and is evaluating two projects: A and B. Project A involves an initial investment of 6,988 dollars and an expected cash flow of 11,251 dollars in 6 years. Project A is considered more risky than an average-risk project at Red Royal Technology, such that the appropriate discount rate for it is 1.54 percentage points different than the discount rate used for an average-risk project at Red Royal Technology. The internal rate of return for project A is 8.26 percent. Project B involves an initial investment of 6,919 dollars and an expected cash flow of 10,240 dollars in 5 years. Project B is considered less risky than an average-risk project at Red Royal Technology, such that the appropriate discount rate for it is 2.17 percentage points different than the discount rate used for an average-risk project at Red Royal Technology. The internal rate of return for project B is 8.16 percent. What is X if X equals the NPV of project A plus the NPV of project B?
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