# Question: GiS Inc has the following four projects on hand

GiS Inc. has the following four projects on hand:

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The cash flow in the table is accumulative. Assume that RF = 5%, ERM = 12%, firm-beta = 1.2, after-tax cost of debt = 6.5%. The firm is financed by 40-percent debt and 60-percent equity. Projects 1, 2, and 3 have the same capital structure as the firm, while project 4 has a 1-percent risk premium. Calculate the cost of capital for the four projects using the following methods:

a. The payback period for projects 1, 2, and 3: If the cut-off period for screening projects 1 and 2 is 3.5 years and for project 3 is 2.25 years, which project(s) should be rejected?

b. The discounted payback period method for project 4: If the cut-off period for screening project 4 is 3.25 years, should it be accepted?

.:.

The cash flow in the table is accumulative. Assume that RF = 5%, ERM = 12%, firm-beta = 1.2, after-tax cost of debt = 6.5%. The firm is financed by 40-percent debt and 60-percent equity. Projects 1, 2, and 3 have the same capital structure as the firm, while project 4 has a 1-percent risk premium. Calculate the cost of capital for the four projects using the following methods:

a. The payback period for projects 1, 2, and 3: If the cut-off period for screening projects 1 and 2 is 3.5 years and for project 3 is 2.25 years, which project(s) should be rejected?

b. The discounted payback period method for project 4: If the cut-off period for screening project 4 is 3.25 years, should it be accepted?

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