California best Truck project. Question: What is the company’s cost of capital?

Question

California best Truck project.

Question: What is the company’s cost of capital? What is the appropriate discount factor (which may be different) for you to use in evaluating the bus project?

California Engine Year Cash Flow Discount Factor DCF 1 -192 0.91 -175 2 168 0.83 139 3 246 0.75 185 4 254 0.69 174 5 262 0.62 163 6 286 0.57 174 7 295 0.52 152 8 304 0.47 143 9 313 0.43 134 10 323 0.39 125 11 333 0.35 118 12 343 0.32 110 13 353 0.29 103 14 364 0.27 97 15 375 0.24 91 16 387 0.22 85.3 17 399 0.2 80 18 411 0.18 75 19 424 0.17 70.3 20 454 0.15 68.6

Explanation / Answer

Since no other informtion is available for cost of capital, in these case we need to assume that discount rate and cost of capital are same.
Is we look at discount factor in year 10 which is 0.39
Discount factor = 1(1+r
Caclulating:
0.91=1/(1+r)^10
gives r = 9.89%

Similarily the discount rate for each year is caclculated in the given table:

California Engine Year

As we can see that the discount rates differ for each year a little bit so in order to be at a safe side we can use 10% as the appropriate discount rate.

California Engine Year

Year Cash Flow Discount Factor DCF Rate 1 -192 0.91 -175 1.098901099 9.89% 2 168 0.83 139 1.0976426 9.76% 3 246 0.75 185 1.100642416 10.06% 4 254 0.69 174 1.097204872 9.72% 5 262 0.62 163 1.100326727 10.03% 6 286 0.57 174 1.098215386 9.82% 7 295 0.52 152 1.097920643 9.79% 8 304 0.47 143 1.098974886 9.90% 9 313 0.43 134 1.098311996 9.83% 10 323 0.39 125 1.098736468 9.87% 11 333 0.35 118 1.100141024 10.01% 12 343 0.32 110 1.099607015 9.96% 13 353 0.29 103 1.099902021 9.99% 14 364 0.27 97 1.098036746 9.80% 15 375 0.24 91 1.099814017 9.98% 16 387 0.22 85.3 1.099255336 9.93% 17 399 0.2 80 1.099299126 9.93% 18 411 0.18 75 1.099952041 10.00% 19 424 0.17 70.3 1.097748085 9.77% 20 454 0.15 68.6 1.099500515 9.95%

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