Question
A company has a WACC of 11%. It is in the business of selling fast food in North America. Now it has expansion plans to
A company has a WACC of 11%. It is in the business of selling fast food in North America. Now it has expansion plans to open up fast food restaurants in China. It expects to earn a return on this investment of 12%. Which of the following statements is true?
a. It should increase its cost of capital to a higher percentage to reflect its higher risk to decide whether or not to go forth with this investment in China.
b. It should decrease its cost of capital to a higher percentage to reflect its higher risk to decide whether or not to go forth with this investment in China.
c. It should for sure ahead for sure with the expansion, since the return is higher than the cost of capital.
d. It should convert its WACC to a Chinese cost of capital by multiplying the WACC times an exchange rate.
e. The company should never consider a project of higher than normal risk.
2. A capital project requires a $50,000 increase in working capital. It also requires equipment at a price of $200,000. It takes $20,000 to install the equipment and $15,000 to ship the equipment to the desired location. The income tax rate is 35% and equipment is depreciated for income tax purposes on a straight line basis. What is the project's initial cash flow?
a. 285,000
b. 250,000
c. 200,000
d. 120,000
e. 235,000
ANSWER BOTH PLEASE!
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