Look back to the cash flows for projects F and G in Section 5-3. The cost of

Question:

Look back to the cash flows for projects F and G in Section 5-3. The cost of capital was assumed to be 10%. Assume that the forecasted cash flows for projects of this type are overstated by 8% on average. That is, the forecast for each cash flow from each project should be reduced by 8%. But a lazy financial manager, unwilling to take the time to argue with the projects' sponsors, instructs them to use a discount rate of 18%.

a. What are the projects' true NPVs?

b. What are the NPVs at the 18% discount rate?

Cash flows for projects F and G

Cash Flows ($) Project IRR (%) NPV at 10% Etc. Co C2 C3 C4 C5 33 3,592 +6,000 -9,000 +5,000 +4,000 20 -9,000 +1,800 9,00

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...