Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider the following case study and answer the questions. Microsoft is evaluating a potential investment in a new datacenter facility located in Europe. The initial

Consider the following case study and answer the questions.

  • Microsoft is evaluating a potential investment in a new datacenter facility located in Europe. The initial capital investment in this facility is $10 million with an expected useful life of 5 years.
  • The datacenter is to be depreciated to a book value of $0 over the 5 years and it is expected that it can be sold for $2 million at the end of the project.
  • Microsoft has already commissioned a consulting firm in order to perform a technical due diligence of the facility. The services fee paid amount to $500,000.
  • The gross revenue that Microsoft is planning to generate with the new facility will be $2.8 million per year for the 5 years (starting at the end of year 1
  • The annual variable cost for the datacenter will be 25% of the gross revenues for every year.
  • The project requires $500,000 of working capital immediately but it will not require any other working capital investments during its life. The working capital will be recovered in the last year of the project.
  • The corporate tax rate is 30% and Microsoft has a weighted average cost of capital of 15%.
  • Microsoft is planning to finance this project using a higher proportion of debt than the one used to finance the company as a whole.

You are told in the question that Microsoft will be financing the project using a higher proportion of debt than the one used to finance the company as a whole. What risk is Microsoft incurring by using the company's WACC as a discount rate?What would happen to the WACC and NPV of the project in the case Microsoft would be using the appropriate discount rate?(4 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Financial Management

Authors: Eugene F. Brigham, Phillip R. Daves

11th edition

978-1111530266

More Books

Students also viewed these Finance questions

Question

Examine data collection in research using the questions provided.

Answered: 1 week ago

Question

T F Entrepreneurs are born, not made.

Answered: 1 week ago

Question

T F Entrepreneurs typically have a high internal locus of control.

Answered: 1 week ago

Question

T F Sole proprietorships generate the highest sales revenue.

Answered: 1 week ago