8. You have calculated an investment to have an NPV of $1. Do you ACCEPT or REJE

Question

8. You have calculated an investment to have an NPV of $1. Do you ACCEPT or REJECT this project, given no further information. Assume you are satisfied with the expected payback of the project.

9. Risk free rate: 2.3%

Beta: 1.8

Equity risk premium: 7.5%

D/E: 0.8

Cost of debt (pretax): 5.5%

Corporate tax rate: 27%

Initial investment (CF at year 0): 47,000

Cash flow at end of year 1: 17,500

Cash flow at end of year 2: 19,900

Cash flow at end of year 3: 20,650

[No more cash flows.]

FIND: NPV

[HINT: First, find WACC. Then, use this as the discount rate to find the present value of future cash flows. Then subtract initial cost to find NPV....]

10.If your firm has a current ratio less than 1.0, then what must be true:

a. D/E must also be less than 1.0

b. Profit margin cannot be positive

c. Profit margin must be positive

d. Working capital must be negative

Explanation / Answer

8)

Net present value (NPV) = Present value of cash inflows-Present value of cash outflows.

If a project has positive NPV, firm should accept the project and vice-versa. A project with positive NPV will increase firm value. Here, NPV is $1. So project should be accepted.

Accept the project.

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