Use the following information to answer questions 6 and 7 Carolina Company is co

Question

Use the following information to answer questions 6 and 7 Carolina Company is considering and exclusive, equally risky, and are not repeatable 8 projects S and L, whose cash flows are shown below. These projects are mutually Year Project S $1,050 $675 $650 $1,050 $360 $360 $360 $360 2 4 6. Assuming a WAC a. Choose project S, adds $136.31 to firm value b. Choose project L, adds $149.03 to firm value c. Choose project S, adds $253.72 to firm value d. Choose project L, adds $238.37 to firm value C of 7.75%, which project should Carolina choose and how much value will that project add? At what cost of capital should Carolina be indifferent between projects S and L? a. 4.54% b. 5.75% c. 8.99% d. 11.78% 7.

Explanation / Answer

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Year Project S Project L PVF at 7.75% Present value Present value A B C D = A x C E = B x C 0 -1050 -1050 1 $      (1,050.00) $      (1,050.00) 1 675 360 0.928074246 $            626.45 $            334.11 2 650 360 0.861321806 $            559.86 $            310.08 3 360 0.799370586 $                     -   $            287.77 4 360 0.741875253 $                     -   $            267.08 NPV = sum(0 to 4) $            136.31 $            149.03 Select L 6b Choose project L, add $149.03 to firm value Year Project S Project L Differential A B 0 -1050 -1050 0 1 675 360 -315 2 650 360 -290 3 360 360 4 360 360 IRR = 8.99% IRR(Values 0 : Values 4) Ans C 8.99%

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