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Hello Mr Moffat,
I just got some confusion on some certain topics,
1) When we are calculating the project duration are we supposed to discount using the company WACC or the IRR?
2) When calculating the project duration are we supposed to include the outflows when discounting or only use the inflows/returning phase?
3) When calculating weighted average Asset beta, can we use the company’s equity values or debt values during computation lets say we are given both debt and equity values of individual projects or we just sum up all the asset beta of the projects divide by number of projects.
I really appreciate for your help.
1 If measuring the average time to recover the initial investment, then you would discount at the IRR. However, if measuring the average time to recover the present value, then discount at the WACC. In the exam I would discount at the WACC unless told to do different.
2) Use only the return phase cash flows.3) I am a bit confused by the question. You will normally get the asset beta of each project by taking the beta for a company in a similar business and (assuming you are given the asset beta) then using the debt and equity in the similar business to calculate each asset beta.
When combining several projects, the overall beta is the weighted average of the individual betas, weighting by the proportion invested in each project.
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