BANK 2007 Business Finance Topic 7 Workshop Exercises Ex-A Consider a project with the following cash flows: (b) (c) Year 0 1 2 3 4 5 Cash flow -120 30 35 40 50 55 If the cost of capital is 10%, should the project be accepted? If the cost of capital is 15%, should the project be accepted? If the cost of capital is 20%, should the project be accepted? Ex-B Consider a project that has an expected life of 4 years. The cost to set the project up is estimated at $400,000. The project has cash flows of $120,000 in the first year which are anticipated to grow by 10% each year over the life of the project. The cost of capital is estimated at 10%. a) Would you recommend that this project be accepted? b) Imagine that the growth in the economy slows such that your expected growth in cash flows slows to 5% per annum. Would you recommend that the project be accepted? c) In addition to the slower growth rate, suppose that competition has increased the riskiness you associate with the cash flows from the project. Assume the slower growth rate indicated above (5%) and an increase in the cost of capital to 15% demanded by investors. Again would you recommend the project?