Question

Wilderness Adventures specializes in back-country tours and resort management. Travel Excitement specializes in making travel reservations and promoting vacation travel. Wilderness Adventures has an after tax cost of capital of 13 percent and Travel Excitement has an after tax cost of capital of 11 percent. Both firms are considering investing in new web sites that will enhance online reservations. The estimated net present value of such a project is estimated at $87,000 at a discount rate of 11 percent and -$12,500 at a 13 percent discount rate. Which firm or firms, if either, should accept this project

Answer 1

Travel Excitement

Step-by-step explanation:

Cost of Capital shows the risk of the Company.

The Cost of Capital is the minimum return that is expected from a project. The Cost of Capital is therefore used to calculate the Net Present Value of the Project for each firm.

Accept only Project that give a positive Net Present Value at a particular cost of capital.

Thus, Travel Excitement with a risk of 11% and likely to get a positive Net Present Value of $87,000 should accept this project.