# 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 WACC_{AT} 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?

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