Exercise

Comparing project NPV with IRR

Companies use their WACC as the discount rate when calculating the net present value of potential projects.

In the same way that you discounted values by inflation in the previous chapter to account for costs over time, companies adjust the cash flows of potential projects by their cost of financing (the WACC) to account for their investor's required rate of return based on market conditions.

Now that you calculated the WACC, you can determine the net present value (NPV) of each project's cash flows. The cash flows for projects 1 and 2 are available as cf_project1 and cf_project2.

Instructions 1/2

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  • Set your weighted average cost of capital (wacc) equal to 12.9%.
  • Calculate the net present value of both proposed projects using np.npv().