Question
1.You have a project that will provide $150 yearly for 30 years. The initial discount rate for this project is 10%. The initial investment is
1.You have a project that will provide $150 yearly for 30 years. The initial discount rate for this project is 10%. The initial investment is $900. Compute the net present value and decide either to accept or reject the project.
2.In order to finance this project you issue a 5-year zero coupon bond for the total amount of the initial investment. The principal is $1800. If taxes are 30%. What is the WACC for this project and given that, the new NPV? Do you accept or reject the project?
3.Instead of using only debt, you decide to use a combination of debt and equity. You issue a 5-year zero coupon bond for $700. The principal is $1,200. The remaining is financed using equity. The is 1.2, the market portfolio return is 20%, and the risk-free rate is 2%. Taxes are 30%. What is the new WACC and new NPV for the project? Do you accept or reject?
4. You notice the cash flow were wrongly predicted. Now you know you will receive $100 the first year and after that this cash flow will grow at 5% per year. The initial investment is the same. What is the internal rate of return for this project? Given this IRR do you accept or reject the project? For the comparison use the WACC computed in the previous point.
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