Homework Answers
1st
If New Project is Riskier than firm's existing project than it should be charged at Higher cost of Capital because its a basic expections from of any investor that if they are bearing more risk than they must be compensated by the higher return on those Riskier projects. So as risk Increase required rate of Return by Investors will increase and it will cause rise in discount rate.
2nd
Using simple firmwide WACCto evaluate a new project giving unfair advantage to project that present more risk than a firm's average data.
How??
As we discussed above if the Project is much Riskier it may st st h higher discount rate but if we use firmwide WACC it will average out whole firm's risk and it might be lower than the our new Riskier projects so if we use firmwide WACC so such Riskier projects' Cashflow will be discounted at lower rate.
3rd
It is Separation Principal in which the Project manager separates the calculation of Financial activity and Investing activity
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Blue Moose Home Builders is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $750,000 Blue Moose Home Builders has been basing capital budgeting decisions on a project's NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Blue Moose Home Builders's WACC is...
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