Question
Company Dark Moon is deciding how to invest 2,000,000. Company will use a loan in the amount of 500,000 with the interest rate of 4%
Company Dark Moon is deciding how to invest 2,000,000. Company will use a loan in the amount of 500,000 with the interest rate of 4% p.a. The rest will be financed by equity. Treasury bond rate is at the moment at 2% p.a. and company estimates the risk premium at 6% p.a. Corporate tax rate is at 20%. Company considers two possible investments. Expected cash inflows are planned as follows: year 1 year 2 year 3 project 1 100,000 1,000,000 1,200,000 project 2 1,400,000 800,000 a) Calculate WACC (2 points) b) Calculated payback period for both projects.(2 points) c) Calculate net present value for both projects (4 points) d) We assume, that the projects will last "forever" i.e. calculate the terminal value of both projects and present value of the terminal value. Assume the growth rate of 0%.(4 points) e) Calculated total value of both project (2 points) 1) Based on your calculations choose better project and explain your choice. (2 points) BI
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