Frieda Inc. is considering a capital expansion project. The initial investment o

Question

Frieda Inc. is considering a capital expansion project. The initial investment of undertaking this project is $105,500. This expansion project will last for five years. The net operating cash flows from the expansion project at the end of year 1, 2, 3, 4 and 5 are estimated to be $22,500, $25,800, $33,000, $45,936 and $58,500 respectively. Frieda has a capital structure consisting of 20% debt and 80% equity.  The after-tax cost of debt is 16% and the cost of equity is 18.5%.

Based on Frieda%u2019s weighted average cost of capital calculated, what is the profitability index of undertaking this project? That is, what is the profitability index if the weighted average cost of capital is used as the discount rate?  

       0.87

        1.01

        1.15

        0.74

Based on the Profitability Index (PI) obtained in Question 32, shall Frieda undertake the expansion project?

       Yes, because PI >1.

        No, because PI <1.

Continued from the Question , what is the internal rate of return (IRR) if Frieda undertakes this project?

       15.20%

        18.51%

        22.50%

        11.25%

Explanation / Answer

ans-1.01,,,,,,yes because PI >1,,,,,,18.51%

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