PRACTICE TEST
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PRACTICE TEST #1
Section
2.5 Cash Flow of the Firm
McSherry Interiors has beginning net fixed assets of $
234,100
and ending net fixed assets of $
243,600
. Assets valued at $42,500 were sold during the year. Depreciation was $62,500
. What is the amount of net capital spending?
Explanation
Net capital spending = $243,600 − 234,100 + 62,500
Net capital spending = $72,000
Section
2.5 Cash Flow of the Firm
Zhao Pediatrics has operating cash flow of $11,618
. Depreciation is $2,345 and interest paid is $395. A
net total of $485 was paid on long-term debt. The firm spent $6,180
on fixed assets and decreased
net
working capital by $420
. What is the cash flow of the firm?
Explanation
CF(
A
) = $11,618 − 6,180 − (−$420)
CF(
A
) = $5,858
Section
2.5 Cash Flow of the Firm
Grimaldi, Incorporated, has total revenue of $
4,116
, depreciation of $319, selling and administrative expenses of $554
, interest expense of $162, dividends of $75, cost of goods sold of $2,354
, and taxes of $186
. What is the operating cash flow?
OCF = $4,116 − 2,354 − 554 − 186
OCF = $1,022
Section
5.2 The Payback Period Method
You are considering a project with an initial cost of $10,140. What is the payback period
for this project if the cash inflows are $2,300, $4,500, $9,100, and $13,000 for
Years 1 to 4, respectively?
Explanation
Payback = 2 + ($10,140 − 2,300 − 4,500)/$9,100
Payback = 2.37 years
Section
5.3 The Discounted Payback Period Method
A project has an initial cost of $10,600 and produces cash inflows of $
3,700
, $
4,900
, and $
2,500
for Years 1 to 3, respectively. What is the discounted payback period
if the required rate of return is 7.5
percent?
Explanation
PV = $3,700/1.075 + $4,900/1.075
2
+ $2,500/1.075
3
PV = $9,694.39
The project will never pay back on a discounted basis.
Section
5.5 Problems with the IRR Approach
An analyst is considering two mutually exclusive projects that have been assigned the same discount rate of 10.5 percent. Project A has an initial cost of $54,500
, and should produce cash inflows of $16,400
, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial cost of $79,400
, and should produce cash inflows of $0, $48,300, and $42,100, for Years 1 to 3, respectively.
What is the incremental IRR?
Explanation
0 = [−$79,400 − (−$54,500)] + ($0 − 16,400)/(1 + IRR) + ($48,300 − 28,900)/(1 +
IRR)
2
+ ($42,100 − 31,700)/(1 + IRR)
3
IRR = −15.40%
Calculation of incremental internal rate of return
Formula:
A
B
C
D
1
Difference
2
Years
A
B
3
0
-54500
-79400=B3-C3
4
1
16400
0=B4-C4
5
2
28900
48300=B5-C5
6
3
31700
42100=B6-C6
7
IRR
=IRR(B3:B6)
=IRR(C3:C6)
=IRR(D3:D6)
Computation:
A
B
C
D
1
Differen
ce
2Years
A
B
3
0
-54500
-79400
24900
4
1
16400
0
16400
5
2
28900
48300
-19400
6
3
31700
42100
-10400
7IRR
17.43%
5.42%
-15.40%
Explanation:
The incremental IRR is calculated by equating the present value of the incremental cash flows to the incremental initial investment. The incremental cash flow is the difference between the annual cashflows of
the two projects.
Section
5.5 Problems with the IRR Approach
Project A has an initial cost of $75,000 and annual cash flows of $33,000 for three years. Project B costs $60,000 and has cash flows of $25,000, $30,000, and $25,000 for Years 1 to 3, respectively. Projects A and B are mutually exclusive. The incremental IRR is _______ percent
and if the required rate is higher than the crossover rate then Project _______ should be accepted.
Explanation
0 = [−$75,000 − (−$60,000)] + ($33,000 − 25,000)/(1 + IRR) + ($33,000 − 30,000)/(1 + IRR)
2
+ ($33,000 − 25,000)/(1 + IRR)
3
IRR = 12.89%
Using a discount rate of 15 percent:
NPV
A
= −$75,000 + $33,000{1 − [1/(1 + .15)
3
]}/.15
NPV
A
= $346.43
NPV
B
= −$60,000 + $25,000/1.15 + $30,000/1.15
2
+ $25,000/1.15
3
NPV
B
= $861.35
Section
8.1 Bonds and Bond Valuation
Consider a bond with an annual coupon rate of 7 percent that pays semiannual interest and matures in ten years. The market rate of return on bonds of this risk is currently 3.5 percent. What is the current value of a $1,000 face value bond?
Explanation
Bond value = [.07($1,000)/2]{[1 − 1/(1 + .035/2)
10(2)
]/(.035/2)} + $1,000/(1 + .035/2)
10(2)
Bond value = $1,293.18
Look for an excel
Consider a bond with a coupon rate of 8 percent that pays semiannual interest and matures in eight years. The market rate of return on bonds of this risk is currently 11 percent. What is the current value of a $1,000 face value bond?
???? ??? https://www.omnicalculator.com/finance/pvifa
Face Value = $1,000
Annual Coupon = 8%*$1,000 = $80
Semi-annual Coupon = $80 / 2 = $40
Annaul Market rate = 11%
Semi-annual Market rate = 5.5%
Maturity in 8 years
Price = $40*PVIFA(5.5%, 16) + 1,000*PVIF(5.5%, 16)
Price = $40*(1-(1/1.055)^16)/0.055 + 1,000/1.055^16
Price = $843.07
So, current price of bond is $843.07
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Related Questions
QUESTION 26
Find the IRR of an investment having initial cash outflow of $213,000. The cash flows, and corresponding dates are given below.
($213,000)
1/1/2013
$65,200
$96,000
$73,000
$55,400
A.
B.
8.45%
12.32%
C. 15.67%
D. None of the above
5/7/2014
4/3/2015
6/8/2016
2/9/2017
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flows)
You are given three investment alternatives to analyze. The cash flows from these three investments are as follows:
Investment
End of Year
A
B
C
1
$
16,000
$
21,000
2
16,000
3
16,000
4
16,000
5
16,000
$
16,000
6
16,000
63,000
7
16,000
8
16,000
9
16,000
10
16,000
21,000
(Click
on the icon
in order to copy its contents into a
spreadsheet.)
Assuming an annual discount rate of
19
percent, find the present value of each investment.
Question content area bottom
Part 1
a. What is the present value of investment A at an annual discount rate of
19
percent?
$enter your response here
(Round…
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11:52
Investment Appraisal (Year 2 Column 2...
2 years 8 months
3. An investment has the following cash
flows. What is the ARR?
Year 0
-120,000
Year 1
30,000
Year 2
40,000
60,000
Year 3
Year 4
90,000
90,000
Year 5
38%
36%
32%
35%
4. An investment has the following cash
flows. What is the ARR?
Year 0
-90,000
Year 1
45,000
...
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10
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QUESTION 5
Your firm has net income of $343 on total sales of $1,360. Costs are $750 and depreciation is $120. The tax rate is 30 percent. The
firm does not have interest expenses. What is the operating cash flow?
$833
$463
$610
$343
$490
QUESTION 6
Seaborn Co. has identified an investment project with the following cash flows.
Year Cash Flow
$950
1,050
1
2
3
4
1,320
1,200
If the discount rate is 10 percent, what is the present value of these cash flows?
O3542.76
3578.84
3418.66
4470.00
3847.03
Click Save and Submit to save and submit. Click Save All Answers to save all answers.
Save All Answers
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Problem No. 3
The cash flows for an investment are shown below:
Year
1
3
4
5
Cash flow $1400 1500 1600 1700 -3,000
Calculate EUAB at 7% per year.
$2000
$1800
$1600
$1400
$1200
$1200
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Problems
1. The capital investment committee of Taiwan Semiconductor Company is considering two capital
investments. The estimated income from operations and net cash flows from each investment
are as follows:
123 45
Year
Total
Lithography Machine
Income from
Operations
$26,000
21,000
7,000
4,000
Problem 1 Instructions
1,450
$59,450
Net Cash Flow
a. Compute the following:
i.
ii.
$41,000
35,000
22,500
18,000
16,150
$132,650
Photoresist Machine
Income from
Operations
$12,250
12,250
12,250
12,250
12,250
$61,250
Net Cash Flows
Each project requires an investment of $75,000. Straight-line depreciation will be used, and no residual
value is expected. The committee has selected a rate of 12% for purposes of the net present value
analysis.
$25,250
25,250
25,250
25,250
25,250
$126,250
The average rate of return for each investment.
The net present value for each investment. Use the present value of $1 table appearing
in this chapter (Exhibit 2). (Round present values to the nearest dollar.)
b.…
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Question content area top
Part 1
(Related to Checkpoint 6.6)
(Present
value of annuities and complex cash
flows)
You are given three investment alternatives to analyze. The cash flows from these three investments are as follows:
Investment Alternatives
End of Year
A
B
C
1
$
14,000
$
14,000
2
14,000
3
14,000
4
14,000
5
14,000
$
14,000
6
14,000
70,000
7
14,000
8
14,000
9
14,000
10
14,000
14,000
(Click
on the icon
in order to copy its contents into a
spreadsheet.)
Assuming an annual discount rate of
15
percent, find the present value of each investment.
Question content area bottom
Part 1
a. What is the present value of investment A at an annual discount rate of
15
percent?…
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Question content area top
Part 1
(IRR
calculation)
Determine the IRR on the following projects:
a. An initial outlay of $13,000 resulting in a single free cash flow of $17,165 after 9 years
b. An initial outlay of $13,000 resulting in a single free cash flow of $46,394 after 15 years
c. An initial outlay of $13,000 resulting in a single free cash flow of $105,001after 25 years
d. An initial outlay of $13,000 resulting in a single free cash flow of $13,653 after 4 years
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For each of the following cash flows, indicate whether it should be included in the calculations evaluating an
investment project lasting three years. Explain why.
a. A new machine bought for the project.
b. The annual depreciation expense (straight line depreciation rule used) for this machine.
c. Tax benefits on depreciation for the machine.
d. Net working capital expenditures of £6,000 in year 0; £8,000 in year 1; £4,000 in year 2; 0 in year 3.
e. Consultancy fee to identify the right machine for the job.
f. Use of 20% capacity (otherwise not utilized) of another machine bought for another project for £15,000.
g. Dividends paid to shareholders funded by the revenue from this project.
h. Sale of the old machine you are replacing with this new project.
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- Suppose that the cash flows of two investments are as follows:
Unit: $1000
CASH FLOW AT YEAR
1
YEAR:
2
Investment A (11,500,000)
5,650,000 5,250,000 3,700,000 2,500,000 2,200,000
Investment B (11,500,000) 2,950,000 4,250,000 5,000,000 5,100,000 4,900,000
Using the investment decision rules (i.e., NPV & IRR) to select the best investment.
Suppose that the hurdle rate, r is16%.
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The Zinger Corporation is considering an investment that has the following data:
Year 1 Year 2 Year 3 Year 4 Year 5
$8,000 $3,000
Investment
Cash inflow $2,000 $2,000 $5,000 $4,000
$4,000
Cash inflows occur evenly throughout the year. The payback period for this investment is:
A. 3.0
B. 4.0
C. 3.5
D. 4.5
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QUESTION THREE
Bates Limited is considering investing in two capital investment projects. The expected capital expenditure and its related cash flows is given in the table below
Details
Period
Project A (K)
Project B (K)
Cash Expenditure
At outset
410,000
500,000
Cash inflow
Year 1
140,000
170,000
Cash inflow
Year 2
170,000
195,000
Cash inflow
Year 3
135,000
180,000
Cash inflow
Year 4
110,000
140,000
Your company considers its cost of capital to be 13%. For Project B, assessed as the riskier project of the two, a risk-adjusted cost of capital of 15% is considered appropriate. Base rate is presently 5% and the company pays a margin of 1%, giving an all in borrowing rate of 6%. Inflation is presently 3%.
(a) Assess the two projects using the investment appraisal technique of internal rate of return (IRR).
(b) State which project you would recommend to your board and explain in detail your reasons.
(c) Besides the IRR…
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QUESTION 1
Suppose that you are working as a capital budgeting analyst in a finance department
of a firm and you are going to evaluate two mutually exclusive projects by implementing different
capital budgeting techniques. The cash flows for these two projects are given below.
CASH FLOW (A)
-$17,000
8,000
7,000
5,000
3,000
CASH FLOW (B)
-$17,000
2,000
5,000
9,000
9,500
YEAR
3
4
1 Calculate the Payback Period of each project. Which project should you accept
according to this method? Explain whether the Payback Period is or is not an appropriate
method in this case.
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QUESTION 32
As a member of Apache Oil Corporation's financial staff, you must estimate the Year 1 cash flow for a proposed project with the following data. What is the Year 1 cash flow?
Sales revenues, each year
Depreciation
Other operating costs
Interest expense
Tax rate
a. $16,351
O b. $17,212
O c. $18,118
O d. $19,071
e. $20,075
$42,500
$10,000
$17,000
$4,000
35.0%
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1- Calculate the rate of return to be obtained for the investment to be made in the 1st year
according to the cash flow diagram below.
year
1
4
cash flow, $
-80000
9000
70000
30000
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PROBLEM # 2
Consider the following cash flow of a company:
Year
Cash flow
-600
10
-5000
11-40
1000
a) Compute the IRR for this table
b) At MARR 15% determine the acceptability of each project.
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2. Compute the IRR for the investment represented by the following cash flow table:
Year
1
4
6.
7.
Cash Flow
-1200
+350
+300
+250
+200
+150
+100
+50
(in $1000's)
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QUESTION 1
Given the following information Please calculate the Free Cash Flow to Equity
EBIT
Net Income
Tax rate
Depreciation
Capital expenditure
2207.9
1513.5
21.80%
1807.1
954.6
Change in non-cash Working Capital -2176.3
Change in long term debt
Interest Expense
Liabilities
Total
Long Term debt
Total Assets
4755
5470
3902
5628
927.6
395.3
24511.8
13220.6
26168.2
arrow_forward
11:52
Investment Appraisal (Year 2 Column 2...
35%
4. An investment has the following cash
flows. What is the ARR?
Year 0
-90,000
Year 1
45,000
10,000
Year 2
Year 3
30,000
30,000
Year 4
6%
7%
9%
5. Which of the following investments would
you choose based on payback?
Project
3 years 6 months
5 years 10 months
A
В
...
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Net Present Value Method, Present Value Index, and Analysis
First United Bank Inc. is evaluating three capital investment projects using the net present value method. Relevant data related to the projects are summarized as follows:
BranchOfficeExpansion
ComputerSystemUpgrade
ATMKioskExpansion
Amount to be invested
$787,317
$584,976
$298,035
Annual net cash flows:
Year 1
391,000
278,000
164,000
Year 2
364,000
250,000
113,000
Year 3
332,000
222,000
82,000
Present Value of $1 at Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683
0.636
0.572
0.482
5
0.747
0.621
0.567
0.497
0.402
6
0.705
0.564
0.507
0.432
0.335
7
0.665
0.513
0.452
0.376
0.279
8
0.627
0.467
0.404
0.327
0.233
9
0.592
0.424
0.361
0.284
0.194
10
0.558
0.386
0.322
0.247
0.162
Required:
1. Assuming that the desired rate of return is 10%,…
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Question 2
Sunshine Corporation is reviewing an investment proposal. The initial cost of the investment isR52 500. The estimated cash flows and net profit for each year are presented in the schedulebelow. All cash flows are assumed to take place at the end of the year.
year
Net cash flows
Net profit
R20 000
R2 500
R17 500
R3 500
R15 000
R4 500
R12 500
R5 500
R10 000
R6 500
The cost of capital is 12%.
Required:Calculate the following:1. Payback Period 2. Net Present value 3. Accounting rate of return
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Question list
✔Question 1
Data table
A
1
2 Projected cash outflow
3 Net initial investment
4 Projected cash inflows
5 Year 1
6 Year 2
7
Year 3
8 Year 4
9 Required rate of return
↑
Lulus Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $12,000,000 for the year. Lyssa
Bickerson, staff analyst at Lulus, is preparing an analysis of the three projects under consideration by Caden Lulus, the company's owner.
(Click the icon to view the data for the three projects.)
Present Value of $1 table
Read the requirements.
B
Project A
с
Project B
Present Value of Annuity of $1 table Future Value of $1 table Future Value of Annuity of $1 table
D
Project C
$ 6,000,000 $ 4,000,000 $8,000,000
8%
$ 2,050,000 $ 1,100,000 $4,700,000
2,050,000 2,300,000 4,700,000
2,050,000 700,000 50,000
2,050,000
25,000
8%
8%
Requirements
1. Because the company's cash is limited, Lulus thinks the payback method should be used to…
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A company is considering a $240,000 investment in machinery with the following net cash flows. The
company requires a 9% return on its investments.
Initial investment
Required rate of return
Required:
$240,000
9%
(a) Compute the net present value of this investment.
Present Value of Net
Period
1
Net Cash Flows
Cash Flows
$53,000
$48,624
20
49,000
41,242
3
136,000
105,017
4
78,000
55,257
5
61,000
39,646
Totals
$377,000
$289,786
(240,000)
$49,786
Initial investment
Net present value
Verify the value of cell C18 using the NPV function
(b) Should the machinery be purchased?
Yes
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- QUESTION 5 Your firm has net income of $343 on total sales of $1,360. Costs are $750 and depreciation is $120. The tax rate is 30 percent. The firm does not have interest expenses. What is the operating cash flow? $833 $463 $610 $343 $490 QUESTION 6 Seaborn Co. has identified an investment project with the following cash flows. Year Cash Flow $950 1,050 1 2 3 4 1,320 1,200 If the discount rate is 10 percent, what is the present value of these cash flows? O3542.76 3578.84 3418.66 4470.00 3847.03 Click Save and Submit to save and submit. Click Save All Answers to save all answers. Save All Answersarrow_forwardProblem No. 3 The cash flows for an investment are shown below: Year 1 3 4 5 Cash flow $1400 1500 1600 1700 -3,000 Calculate EUAB at 7% per year. $2000 $1800 $1600 $1400 $1200 $1200arrow_forwardProblems 1. The capital investment committee of Taiwan Semiconductor Company is considering two capital investments. The estimated income from operations and net cash flows from each investment are as follows: 123 45 Year Total Lithography Machine Income from Operations $26,000 21,000 7,000 4,000 Problem 1 Instructions 1,450 $59,450 Net Cash Flow a. Compute the following: i. ii. $41,000 35,000 22,500 18,000 16,150 $132,650 Photoresist Machine Income from Operations $12,250 12,250 12,250 12,250 12,250 $61,250 Net Cash Flows Each project requires an investment of $75,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis. $25,250 25,250 25,250 25,250 25,250 $126,250 The average rate of return for each investment. The net present value for each investment. Use the present value of $1 table appearing in this chapter (Exhibit 2). (Round present values to the nearest dollar.) b.…arrow_forward
- Question content area top Part 1 (Related to Checkpoint 6.6) (Present value of annuities and complex cash flows) You are given three investment alternatives to analyze. The cash flows from these three investments are as follows: Investment Alternatives End of Year A B C 1 $ 14,000 $ 14,000 2 14,000 3 14,000 4 14,000 5 14,000 $ 14,000 6 14,000 70,000 7 14,000 8 14,000 9 14,000 10 14,000 14,000 (Click on the icon in order to copy its contents into a spreadsheet.) Assuming an annual discount rate of 15 percent, find the present value of each investment. Question content area bottom Part 1 a. What is the present value of investment A at an annual discount rate of 15 percent?…arrow_forwardQuestion content area top Part 1 (IRR calculation) Determine the IRR on the following projects: a. An initial outlay of $13,000 resulting in a single free cash flow of $17,165 after 9 years b. An initial outlay of $13,000 resulting in a single free cash flow of $46,394 after 15 years c. An initial outlay of $13,000 resulting in a single free cash flow of $105,001after 25 years d. An initial outlay of $13,000 resulting in a single free cash flow of $13,653 after 4 yearsarrow_forwardQuestion 5 - Estimating cash flows For each of the following cash flows, indicate whether it should be included in the calculations evaluating an investment project lasting three years. Explain why. a. A new machine bought for the project. b. The annual depreciation expense (straight line depreciation rule used) for this machine. c. Tax benefits on depreciation for the machine. d. Net working capital expenditures of £6,000 in year 0; £8,000 in year 1; £4,000 in year 2; 0 in year 3. e. Consultancy fee to identify the right machine for the job. f. Use of 20% capacity (otherwise not utilized) of another machine bought for another project for £15,000. g. Dividends paid to shareholders funded by the revenue from this project. h. Sale of the old machine you are replacing with this new project.arrow_forward
- - Suppose that the cash flows of two investments are as follows: Unit: $1000 CASH FLOW AT YEAR 1 YEAR: 2 Investment A (11,500,000) 5,650,000 5,250,000 3,700,000 2,500,000 2,200,000 Investment B (11,500,000) 2,950,000 4,250,000 5,000,000 5,100,000 4,900,000 Using the investment decision rules (i.e., NPV & IRR) to select the best investment. Suppose that the hurdle rate, r is16%.arrow_forwardThe Zinger Corporation is considering an investment that has the following data: Year 1 Year 2 Year 3 Year 4 Year 5 $8,000 $3,000 Investment Cash inflow $2,000 $2,000 $5,000 $4,000 $4,000 Cash inflows occur evenly throughout the year. The payback period for this investment is: A. 3.0 B. 4.0 C. 3.5 D. 4.5arrow_forwardQUESTION THREE Bates Limited is considering investing in two capital investment projects. The expected capital expenditure and its related cash flows is given in the table below Details Period Project A (K) Project B (K) Cash Expenditure At outset 410,000 500,000 Cash inflow Year 1 140,000 170,000 Cash inflow Year 2 170,000 195,000 Cash inflow Year 3 135,000 180,000 Cash inflow Year 4 110,000 140,000 Your company considers its cost of capital to be 13%. For Project B, assessed as the riskier project of the two, a risk-adjusted cost of capital of 15% is considered appropriate. Base rate is presently 5% and the company pays a margin of 1%, giving an all in borrowing rate of 6%. Inflation is presently 3%. (a) Assess the two projects using the investment appraisal technique of internal rate of return (IRR). (b) State which project you would recommend to your board and explain in detail your reasons. (c) Besides the IRR…arrow_forward
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