All projects require the same initial investment, $2,000,000. Moreover, all are
ID: 2776830 • Letter: A
Question
All projects require the same initial investment, $2,000,000. Moreover, all are believed to be of the same risk class. The weighted average cost of capital for the first part is 10%. To simulate your analysis, consider the following questions:
What is the ranking you found by using quantitative methods? Does this ranking differ from the ranking obtained by simple inspection of the cash flows?
What kinds of real investment projects have cash flows similar to those in the exhibit?
The company has the following capital structure:
Account
$
Costs before tax
Long-term Debt
1,500,000
10%
Preferred Stock
500,000
12%
Common Stock
3,000,000
20%
Calculate the weighted average cost of capital (tax is 40%)
Using the same cash flows in exhibit I find the NPV, PI, IRR and MIRR (Use your answer on part one as cost of capital). Which project(s) would you recommend and why?
Project1 Project2 Project3 Project4 Project5 Project6 Project7 Project8 Initial Investment $ 2,000.00 $ 2,000.00 $ 2,000.00 $ 2,000.00 $ 2,000.00 $ 2,000.00 $ 2,000.00 $ 2,000.00 Year 1 $ 330.00 $ 1,666.00 $ 160.00 $ 280.00 $ 2,200.00 $ 1,200.00 $ (350.00) 2 $ 330.00 $ 334.00 $ 200.00 $ 280.00 $ 900.00 $ (60.00) 3 $ 330.00 $ 165.00 $ 350.00 $ 280.00 $ 300.00 $ 60.00 4 $ 330.00 $ 395.00 $ 280.00 $ 90.00 $ 350.00 5 $ 330.00 $ 432.00 $ 280.00 $ 70.00 $ 700.00 6 $ 330.00 $ 440.00 $ 280.00 $ 4,000.00 $ 1,200.00 7 $ 330.00 $ 442.00 $ 280.00 $ 2,250.00 8 $ 1,000.00 $ 444.00 $ 280.00 9 $ 446.00 $ 280.00 $ 2,000.00 10 $ 5,000.00 $ 448.00 $ 280.00 11 $ 450.00 $ 280.00 12 $ 451.00 $ 280.00 13 $ 451.00 $ 280.00 14 $ 452.00 $ 280.00 15 $ 9,000.00 $ (2,000.00) $ 280.00 Sum of cash flow benefits $ 3,310.00 $ 7,165.00 $ 9,000.00 $ 3,561.00 $ 4,200.00 $ 6,200.00 $ 4,560.00 $ 4,150.00 Excess of cash flow Over investment $ 1,310.00 $ 5,165.00 $ 7,000.00 $ 1,562.00 $ 2,200.00 $ 4,200.00 $ 2,560.00 $ 2,150.00Explanation / Answer
The weighted average cost of Capital is 15%
Based on the above calculation Project 3 has the highest net cash flow of $ 5,830. hence project3 is most viable project.
The company has the following capital structure: Account $ Costs before tax Weights Post Tax cost Long-term Debt 15,00,000 10% 0.300 6.00% 0.018 Preferred Stock 5,00,000 12% 0.100 12% 0.012 Common Stock 30,00,000 20% 0.600 20% 0.12 50,00,000 1.000 15%The weighted average cost of Capital is 15%
Project1 Project2 Project3 Project4 Project5 Project6 Project7 Project8 Project1 Project2 Project3 Project4 Project5 Project6 Project7 Project8 Initial Investment 2000 2000 2000 2000 2000 2000 2000 2000 PV factor -2000 -2000 -2000 -2000 -2000 -2000 -2000 -2000 Year 1 330 1,666.00 160 280 2200 1200 -350 0.87 287 1,449 - 139 244 1,914 1,044 -305 2 330 334 200 280 900 -60 0.756 287 291 - 174 244 - 783 -52 3 330 165 350 280 300 -60 0.656 287 144 - 305 244 - 261 -52 4 330 395 280 90 350 0.572 287 - - 344 244 - 78 305 5 330 432 280 70 700 0.497 287 - - 376 244 - 61 609 6 330 440 280 4000 1200 0.432 287 - - 383 244 3,480 - 1,044 7 330 442 280 2250 0.376 287 - - 385 244 - - 1,958 8 1000 444 280 0.327 870 - - 386 244 - - - 9 446 280 2000 0.284 - - - 388 244 - 1,740 - 10 5000 448 280 0.247 - 4,350 - 390 244 - - - 11 450 280 0.215 - - - 392 244 - - - 12 451 280 0.187 - - - 392 244 - - - 13 451 280 0.165 - - - 392 244 - - - 14 452 280 0.141 - - - 393 244 - - - 15 9000 -2000 280 0.123 - - 7,830 -1,740 244 - - - Sum of cash flow NET CASH FLOW 880 4,234 5,830 1,098 1,654 3,394 1,967 1,506