You have been asked to analyze a project where the analyst has estimated the return on capital to be 37% over the ten-year lifetime of the project. The cost of capital is only 12%, but you have concerns about using the return on capital as an investment decision rule. Would it make a difference if you knew that the project was employing an accelerated depreciation method to compute depreciation? Why?
Answer to relevant QuestionsConsider again the project described in Problem 1 (assume that the depreciation reverts to a straight line). Assume that 40% of the initial investment for the project will be financed with debt, with an annual interest rate ...You have estimated the following cash flows on a project: Year Cash Flow to Equity ($) 0 ............. −5,000,000 1 ............. 4,000,000 2 ............. 4,000,000 3 ............. −3,000,000 Plot the NPV ...You work for a firm that has limited access to capital markets. As a consequence, it has only $20 million available for new investments this year. The firm does have a ready supply of good projects, and you have listed all ...You own a rental building in the city and are interested in replacing the heating system. You are faced with the following alternatives: a. A solar heating system, which will cost $12,000 to install and $500 a year to run ...The unlevered beta of electronics firms, on average, is 1.1. The riskless rate is 6.5%, and the market risk premium is 6%. a. Estimate the expected return, using the CAPM. b. If you are a venture capitalist, why might you ...
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