Comment on the following statements: A. \"Because our new expansion project has
ID: 2763944 • Letter: C
Question
Comment on the following statements:
A. "Because our new expansion project has the same systematic risk as the firm as a hole, do no further risk analysis on the project."
b "Our company should accept the new potash mine project at Moosejaw. The cost of additional loans to fund the project is 12%,and our simulations lead us to expect 14% return from the project."
c. It is difficult to decide whether to spend $10 million to reopen our mine because the whether to price of gold is so uncertain. However, if we assume the price of gold grows at an average of 5% a year with a standard deviation of 20% a year, simulation indicates mine the has an average NPV of $500,000. Therefore, we should reopen."
Explanation / Answer
A.
Systematic risk of new project is similar to the company risk. Company already uses various tool to manage the systematic risk. So it is not necessary to further risk analysis on the project
B.
Cost of capital of the project is 12% and expected rate of return from project is 14% which is higher than cost of capital. Since expected rate of return is higher than cost of capital NPV of project will be a positive value.
So company should accept he project.
C.
Since NPV of the reopen of mine is positive value that is $500,000. So company should accept the project.