The following data relate to both questions (a) and (b). A company is considering investing in a
Question:
The following data relate to both questions (a) and (b). A company is considering investing in a manufacturing project that would have a three-year life span.
The investment would involve an immediate cash outflow of £50 000 and have a zero residual value. In each of the three years, 4 000 units would be produced and sold. The contribution per unit, based on current prices, is £5. The company has an annual cost of capital of 8 percent. It is expected that the inflation rate will be 3 percent in each of the next three years.
(a) The net present value of the project (to the nearest £500) is:
(a) £4500
(b) £5000
(c) £5500
(d) £6000
(e) £6500
(b) If the annual inflation rate is now projected to be 4 percent, the maximum monetary cost of capital for this project to remain viable, is (to the nearest 0.5 percent):
(a) 13.0%
(b) 13.5%
(c) 14.0%
(d) 14.5%
(e) 15.0%
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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