your 1. (Multiple IRRs) You would like to open an investment company named Rip'em. The cost...
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your 1. (Multiple IRRs) You would like to open an investment company named Rip'em. The cost of building up the company is $750,000. You offer clients the following deal: For five annual deposits of $500,000 for the next 5 years, you will pay them $2 million at year 6. Your cash flow is expected to be as follows: A B C D E F G H 1 Year 0 1 2 3 4 5 6 2 Cash flow -750,000 500,000 500,000 500,000 500,000 500,000 -2,000,000 a. If your cost of capital is 5%, should you make the investment? b. If your cost of capital is 10%, should you make the investment? c. If your cost of capital is 45%, should you make the investment? d. For what range of cost of capital should you accept the project? Explain. 1 Year 2 Cash flow B C D E F G H 0 1 2 3 4 5 6 -750,000 500,000 500,000 500,000 500,000 500,000 -2,000,000 4 Cost of capital, r NPV 5% 10% 45% 6 Accept/reject? 8 Part d: to decide on a range of cost of capital to accept/reject, make a table of NPV for different r 9 0 Cost of capital, r NPV 11 0% 2 2% 3 4% 4 6% 15 8% 16 10% 17 12% 18 14% 19 16% 20 18% 21 20% 12 22% 23 24% 24 26% 25 30% 26 34% 27 38% 28 42% 29 46% 30 50% 31 54% 2 your 1. (Multiple IRRs) You would like to open an investment company named Rip'em. The cost of building up the company is $750,000. You offer clients the following deal: For five annual deposits of $500,000 for the next 5 years, you will pay them $2 million at year 6. Your cash flow is expected to be as follows: A B C D E F G H 1 Year 0 1 2 3 4 5 6 2 Cash flow -750,000 500,000 500,000 500,000 500,000 500,000 -2,000,000 a. If your cost of capital is 5%, should you make the investment? b. If your cost of capital is 10%, should you make the investment? c. If your cost of capital is 45%, should you make the investment? d. For what range of cost of capital should you accept the project? Explain. 1 Year 2 Cash flow B C D E F G H 0 1 2 3 4 5 6 -750,000 500,000 500,000 500,000 500,000 500,000 -2,000,000 4 Cost of capital, r NPV 5% 10% 45% 6 Accept/reject? 8 Part d: to decide on a range of cost of capital to accept/reject, make a table of NPV for different r 9 0 Cost of capital, r NPV 11 0% 2 2% 3 4% 4 6% 15 8% 16 10% 17 12% 18 14% 19 16% 20 18% 21 20% 12 22% 23 24% 24 26% 25 30% 26 34% 27 38% 28 42% 29 46% 30 50% 31 54% 2
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Related Book For
Excellence in Business Communication
ISBN: 978-0136103769
9th edition
Authors: John V. Thill, Courtland L. Bovee
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