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

GiS Inc. has the following four projects on hand:

.:.

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?

**View Solution:**## Answer to relevant Questions

SK Inc. has a project that requires a $50,000 after-tax initial investment and produces these after-tax cash flows at each year-end: $18,000; $20,000; –$5,000; $40,050; $58,000; and $20,000. The appropriate domestic ...What are independent projects? What are mutually exclusive projects?Assume that SK Inc. has a capital budget of $200,000. In addition, it has the following projects for evaluation. Determine which project(s) should be chosen, assuming k is 13 percent.1. Which of the following will not decrease the present value of the CCA tax shield associated with an investment project?a. An increase in the discount rateb. A decrease in the corporate tax ratec. A decrease in the CCA ...KRZ Company’s tax rate is 40 percent and the appropriate discount rate is 10 percent. It is considering a project. Each asset class is large and continues after the project terminates. KRZ is not capital constrained. There ...Post your question