Refer to Questions 2 and 3. The land for the factory will cost (2 Marks) Info fr

Question

Refer to Questions 2 and 3. The land for the factory will cost

(2 Marks)

Info from questions 2 and 3:  

Beta of J. Corp.'s stock = 0.80

Expected rate of return on J Corp. Stock = 3%

J Corp.'s WACC = 4.62%

Refer to Questions 2 and 3. The land for the factory will cost

$90,000 . The factory will cost $8,050,000 to build and construction will take two years with construction costs payable in equal installments at the start of each year. The factory will operate for 20 years; however, at the end of the fifth, tenth, and fifteenth year of operation, refurbishment costs will be $50,000 . At the end of its 20 year lifespan, the land can be resold for $110,000 . There is a 70% probability that the factory's net operating cash flows will be $648,636 ; however, there is a 30% chance that net cash flows will only be $367,960 . You may assume that net operating cash flows flow at the end of each year. a) What are the Expected net operating cash flows per year? $ Enter Answer (1 Mark)(Round your answer to 2 decimal places) b) What is the Internal Rate of Return for the project? Enter Answer % (1 Mark)(Round your answer to one one-hundreth of a percent) c) What is the Net Present Value of the project? $ Enter Answer (1 Mark)(Round your answer to 2 decimal places) d) Should Anna recommend that the J Corporation build the factory? Yes } Check only one box

(2 Marks)

No

Explanation / Answer

To compute the net present value we need to discount the future cash flow

hence we need to find out the discount rate and discount at Ke = cost of equity

using CAPM model we can find out the cost of equity also known as expected rate of return

Ke = Rf +beta(RM- Rf)

Rm = market risk

Rf = risk free return

Ke = 1+.8(2.5)

Ke = 3%

Given WACC at 4.62% will discount at WACC

To compute the internal rate of return the NPV should be zero hence we need to discount at lower than WACC

Since the NPv is positive at 3% = cost of equity and negative at WACC therefore the Internal rate of return is between 3- 4.62% .

Since the net present value is negative therefore the project should not be accepted and should not continue the factory operations.

Net operating cash flow Sl.No Probability cash flow formula Net cash flow 1 0.7 648636 Probability*cash 454045.2 2 0.3 367960 Probability*cash 110388 Cash flow for 20 years 564433.2

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