Query on calculation of Discount Factor :

DaCosta plc is manufacturer of expensive, built to order motor cars. The company has been trading for 25 years and has seen year-on year growth of sales and profits. Whereas most of the large, mass-production motor manufacturers have experienced over-capacity and falling profit margins in recent years, DaCosta plc has a waiting list of six months for a new car. All cars are manufactured in the UK, but there are sales outlet throughout Europe and Far East. The chief executive of the company, who is still the major shareholder is considering extending the distributor network into the USA where there is a rising demand. At present, American customers have to order direct from the UK.

A detailed assessment of the costs and likely incremental revenues of opening distributorships into major US cities has been carried out. The initial cost of the investment is US$4.5 million. The cash flows, all positive and net of all taxes, are summarized below ………………

Information given:
– The risk-free rate of interest in the USA is 4% per annum and in Britian 5% per annum. These rates are not expected to change in the foreseeable future.

-The company’s post-tax WACC is 14% per annum (UK), which it uses to evaluate all investment decisions.

*To find the US discount factor:
In the UK, the risk-free rate is 5%, and the required rate of return is 14%. The risk premium is 1.14/1.05 = 1.0857

In the US, the risk-free rate is 4% and the risk premium is 8.57%. The required rate of return is therefore 1.04*1.0857 = 1.1291 or 12.91%

I tried figuring out but i do not understand why the answer is not as :
Risk – Free Rate 5% —> Required rate : 14%
Risk-Free Rate 4% —-> Required rate : 11.2%

Thanks for helping me 🙂

Regards,
Joanna.