If the firm you work for has a WACC of 8%. You have the ability to accept or dec
ID: 2724014 • Letter: I
Question
If the firm you work for has a WACC of 8%. You have the ability to accept or decline a project that costs $50,000 initially, producing cash flows of $10,000 a year for three years after that, and then $8,000 for five years after that. Would it be in the best interest of your company to accept of decline this project?
Question 3 options:
A) Accept, because the IRR is higher than the Cost of Capital
B) Decline, because the IRR is lower than the Cost of Capital.
C) Accept, because the IRR is lower than the Cost of Capital.
D) Decline, because the IRR is higher than the Cost of Capital
Subway is analyzing whether they should invest in a new type of sandwich. They have already spent $10,000 on new cookies this year. The new sandwich is estimated to generate $2/sandwich of revenue and cost $1.50 in variable expense. If the investment is taken on Subway’s working capital will increase by $5,000 and it is estimated the revenue from other sandwiches will decrease by $1,500 a year. Instead of investing in the new sandwich Subway could buy a new oven for $80. In figuring Subway’s incremental cash flows, which figure should not be used?
Question 4 options:
A) $80
B) $10,000
C) $1,500
D) $5,000
Explanation / Answer
1-)let r be IRR
hence 50000=10000/(1+r)^1 +10000/(1+r)^2+10000/(1+r)^3+8000/(1+r)^4+8000/(1+r)^5+8000/(1+r)^6+8000/(1+r)^7+8000/(1+r)^8
r=8.62%
Accept beco's the IRR is greater than WACC
2-10000 in new cookies is a sunk cost