Choosing weighted average cost of capital (wacc)
Hi
A company has two projects - A and B - which it wants to finance entirely with debt. If the company proceeds with project A it can get a special govt-subsidized loan for 5%. If it goes with project B it will need to borrow from the bank at 8%. Both projects have similar cash flows (before interest expense) and similar risk profiles and another project of similar risk will have a required rate of return of 12%. Therefore, we would want to discount both project's cash flows at 12% rather than 5% (for project A) and 8% (for project B). If so, how do we differentiate the fact that project A can enjoy the subsidized loan as we will be discounting both projects' cash flows at 12% and arriving at the same NPV.
thanks
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