1.Write down the equation defining a project\'s internal rate of return (IRR). I
ID: 2811050 • Letter: 1
Question
1.Write down the equation defining a project's internal rate of return (IRR). In practice how is IRR calculated? 2. You have the chance to participate in a project that produces the following cash flows: Cash Flows (S) CO 8,000 Ci 5,000 C2 14,000 The internal rate of return is 5 percent. If the opportunity cost of capital is 10 percent, would you accept the offer? 3.Calculate WACC. e of Estimate the cost of equity through CAPM. Company's beta is 1.3, market portfolio rate of return is l 7%, risk-free rate of return is 6%. . What is sensitivity analysis? 5. A company «X is planning to issue bonds with Face Value of 1000 rubles and annual coupon rate of 8%. Bonds will mature in 5 years, coupons are paid annually. The number of outstanding bonds is 1000 000. Profit tax rate is 20%, what is the cost of this source of capital? 6,construct after-tax cash flows. Working capital is estimated as 25% of sales 3000 360 033033904 400 Raw Material ating Income After T Incoeme x Cash Flows 7. Harold Filbert is 30 years of age and his salary next year will be S20,000. Harold forecasts that his salary will increase at a steady rate of 5 percent per annum until his retirement at age 60 a. If the discount rate is 8 percent, what is the PV of these future salary payments? b. If Harold saves 5 percent of his salary each year and invests these savings at an interest rate of 8 percent, how much will he have saved by age 60?
Explanation / Answer
1.
IRR:
-CF0+CF1/(1+IRR)+CF2/(1+IRR)^2......=0
In practice, one uses Microsoft Excel or other softwares to calculate IRR
2.
No, we would not accept the offer as IRR is less than the cost of capital
3.
Cost of equity accoridng to CAPM=risk free rate+beta*(market return-risk free rate)=6%+1.3*(17%-6%)=20.3%
WACC=(20.3%*300000+16%*5000+14%*15000)/(300000+5000+15000)=19.9375%
4.
Sensitivity analysis determines how the different values of independent variable would affect dependent variable under given set of assumptions. Also known as "what-if" or simulation analysis. One uses ssensitivity analysis to predict outcome of decision given certain variables. It helps in determining how changes in one variable would affect the outcome.
5.
after-tax cost of debt=8%*(1-20%)=6.4%
P.S.: I have answered 4 questions
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