A company has 4 million dollars to invest in any of 3 projects. Project A is exp
ID: 3297059 • Letter: A
Question
A company has 4 million dollars to invest in any of 3 projects. Project A is expected to generate revenue of $200000 in the first year and $400000 each year after for another 10 years. Project B is expected to generate $200000 in the first year increasing by 20% each year after for 9 more years. Project C is expected to generate $400000 each year for 12 years. (a) If the cost of capital is 4.5% which if any of these projects is preferable? (b) Would your rating differ if the cost of capital were only 3% over the period?Explanation / Answer
Answer:
Amount available for investing = 4 million dollars
Project A:
Revenue generated in 1st year = $200,000
Revenue generated for another 10 years = $400,000 each year
Total revenue generated after the end of 11 year = 200000 + 400000*10 = $ 4200000 OR 4.2 million dollars
Project B:
Revenue generated in 1st year = $200,000
Increase in Revenue generation each year after for 9 more years = 20% each year
Therefore, total Revenue generated after 10 years
= 200000 + 200000*(1 + 0.2)9 = 200000 + 200000*1.29 = $ 1231956 = 1.232 million dollars
Project C:
Revenue generated each year for 12 years = $400,000 each year
Total Revenue generated after 12 years = 12 * 400000 = $4800000 = 4.8 million dollars
a) Cost of capital = 4.5% = 4000000*0.045 = $ 180000 = 0.18 million dollars
b) Cost of capital = 3% = 4000000*0.03 = $ 120000 = 0.12 million dollars. The rating would not differ if the cost of capital were only 3% over the period.
Project C:
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