Reference no: EM131713173

Question: A company targets a debt ratio of 40 percent. Recently, analysts within the company have assessed a project with both standard WACC and equity residual methods. To apply the latter, analysts considered that the capital borrowed amounted to 40 percent of the project's investment cost. When carrying out sensitivity analyses, the analysts observed that both methods lead to the same conclusion within a large range of assumptions about the selling price of the products, the market share, and other parameters. However, the NPVs obtained with the two methods sometimes differ markedly. Why?