exclusive project.

The initial investment for each project is fixed at 2 million dollars. Company discount all projects based on WACC. Further, all the projects are equally risky projects and the company uses only debt and common equity for financing these projects. It can borrow unlimited amounts at an interest rate of rd 7.703% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (D0) was $2.0, its expected constant growth rate is 4%, and its common stock sells for $20. The tax rate is 40%.

Carefully analyze the Annexure A and answer the following questions in detail.

1.Just by observing cashflows, can you rank the projects? Which one seems best choice. List them in the order of selection from 1^st to last choice.

2.What are the criteria that you might use in evaluating these projects? Which capital budgeting method seems best choice for you? why?

3.List the ranking you found by using each the evaluation criteria starting from payback period to Modified internal rate of return (use pay back, discounted payback, profitability Index, NPV, IRR, and MIRR based on (Wacc discount rate). How do you interpret the results based on each of six criteria?

4.Analyze the cashflows and think of real-life businesses that can generate similar cashflows. List a few of them?

5.Repeat point number 3 while using the cost of capital of 9.25% and 11% respectively. Does the change in cost of capital have any impact on the ranking of the projects? why?

Project # 1 2 3 4 5 6 7 8

Initial Investment -2000 -2000 -2000 -2000 -2000 -2000 -2000 -2000

Year

1 330 1666 160 280 2200 1200 -350

2 330 334 200 280 900 -60

3 330 165 350 280 300 60

4 330 395 280 90 350

5 330 432 280 70 70

6 330 440 280 1200

7 330 442 280 2250

8 1000 444 280

9 446 280

10 448 280

11 450 280

12 451 280

13 451 280

14 452 280

15 1000 -2000 280

NPV 1310 165 8000 1561 2200 200 560 2150