6. Consider four projects, which you expect to generate the following cash flows

Question

6. Consider four projects, which you expect to generate the following cash flows Year Project AProject BProject C (6,000)(600,000) 300,000 300,000 300,000 Project D (600,000) 250,000 300,000 370,000 0 600,000) 1640,000 2 50,000 Your required return on all of the investments is 8%. For each project estimate the Payback Period, Internal Rate of Return (IRR), and Net Present Value (NPV). If these projects are independent which should you undertake? If the investments are mutually exclusive which should you accept? 7. A firm has a debt-to-asset ratio of 40% (based on the market value of assets). The firm's bondholders require a retum of 3.75%, and the equity holders require a return of 9%. The firm's marginal tax-rate is 21%. Estimate the firm's Weighted Average-Cost-of-Capital (WACC)

Explanation / Answer

Ans 6)

By looking the above table with all the information one should select project B, C and D because all have posiive NPV.

If investment are mutually exclusive then one should select project D because it has maximum positive NPV.

Ans 7) WACC = weight of bond * cost of bond * (1 - tax rate) + weight of equity * cost of equity

WACC = .4 * 3.75% * (1 - .21) + 9% * .6 = 6.585%

8% Year 0 1 2 3 4 Payback Period Project A -60000 64000 0.94 Present value -60000 59259.26 NPV -740.741 IRR 6.67% Project B -6000 50000 0.12 Present value -6000 46296.3 NPV 40296.3 IRR 733.33% Project C -600000 300000 300000 300000 2 years Present value -600000 277777.8 257201.6 238149.7 NPV 173129.1 IRR 23.4% Project C -600000 250000 300000 370000 2.14 Present value -600000 231481.5 257201.6 293717.9 NPV 182401.1 IRR 23.04%

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