A company with a cost of capital of 20% has identified projects with the following cash flows: Year Project C Project D 0 -N$100 000 -N$30 000 1 40 000 10 000 2 45 000 15 000 3 50 000

A company with a cost of capital of 20% has identified projects with the following cash flows:

Year	Project C	Project D
0	-N$100 000	-N$30 000
1	40 000	10 000
2	45 000	15 000
3	50 000	20 000
4	55 000	25 000

 

Required 1:

a. Calculate the payback period of each project.                                                                                                                          

b. Calculate the NPV and IRR of each project.                                                                                                                            

c. Which project would you accept on basis of NPV? On basis of IRR?                                                                                      

d. Compare and contrast NPV and IRR by listing advantages and disadvantages of each method. Based on the comparison, which of the two projects would you recommend?                                                                                                                                     

3.2 A firm has total financing of N$20.06 million made up of N$14.46 million worth of equity and N$5.6 million worth of debt. The after tax cost of debt is N$12.8%. The next dividend is expected to be 10 cents, the current price is 50 cents ex-dividend and the growth rate is 8%. The firm is planning to raise N$5 million in new equity capital at 50 cents with floatation costs of 2 cents per share.

 

Required 2:

Calculate the firm's WACC.                                

• Expert Answer

Required 1 a To calculate the payback period of each project we need to determine how long it takes for the cumulative cash inflows to equal or exceed View the full answer