16) ABC pharmaceutical corp. is planning on undertaking a new project. the initi

Question

16) ABC pharmaceutical corp. is planning on undertaking a new project. the initial cash outlay is $50,000 with projected cash inflows of $20,000 per year for the projects 4-year life. assuming a cost of capital of 10% what is the IRR? Should the company accept the project?

17) Haley graphic design is considering two alternative projects. Both projects have initial cash outlays of $10,000. Project A has an expected life of two years with after-tax cash inflows of $6,000 and $8,000 ate the end of 1 and 2 years respectively. Project B has an expected life of 4 years with after-tax cash inflows of $4,000 at the end of the next 4 years. The firms cost of capital is 10%. using replacement chain which project would you pick?

18) Using the information from #17 use the equivalent annuity approach to decide which project is better.

19) ABC energy corp is planning a merger with DEB corp. The projected post-merger BETA of ABC Corp. 1.54 assuming a risk-free of 6% and a market return of 13% what is the discount rate?

20) ABC energy corp is planning a merger with DEB corp. using the above discount rate what would the merger be valued at? ( Use answer from #19)

Pro-forma income statement-ABC/DEB merger

2005 2006 2007 2008 2009

$6.4 $8.8 $ 9.8 $ 10.2 $161

Explanation / Answer

16) ABC pharmaceutical corp. is planning on undertaking a new project. the initial cash outlay is $50,000 with projected cash inflows of $20,000 per year for the projects 4-year life. assuming a cost of capital of 10% what is the IRR? Should the company accept the project?

Answer- IRR=-50000+20000/(1+r)+20000/(1+r)^2+20000/(1+r)^3+20000/(1+r)^4

IRR=r=22% since the IRR is greater tha cost of capital the project should be accepted.

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