Your new moderately risky 5-year project is costing $50,000 and will produce an annual free cash flows
Question:
Your new moderately risky 5-year project is costing $50,000 and will produce an annual free cash flows of $12,000 per year for the entire period, Assuming the riskiness revealed that the cost associated with financing and rewarding risk amounts to a charge of 12%:
a. would you accept the project? Give at least one rationale for your answer as done in class.
b. Would your answer change if the cost of capital falls to 9%? Explain fully.
c. How long will it take the investor to recoup your investing based on n-n-discounting cash flows?
2. (a) Complete the following:
| Capital Required $10M | A | B | C | D | E | F | |
| A 10-year project | $M | Weights | Cost % | Weighted Cost (BT) | Tax = 30% | ||
| Financing | $Value | Column CxD | Weighted Cost (AT) | ||||
| debt | 0.40 | 9.0 | |||||
| preferred stock | 0.10 | 7.0 | ............... | ............ |
(b) Suppose in question (a) above the WACCAT is assessed to be 10% after factoring the risk element to your calculated % above. That is you calculated % + risk% = 10%
Assume also, that the Free Cash Flow from the project is estimated to be $1.2M annually over the 10-year period would you accept the project (use the Net Present Value)?
WHY?
Expert Answer:
Let me try to answer your questions based on the information you provided a To calculate the net present value NPV of the project we need to discount ... View the full answer
