Question
For the first part of this assignment only quantitative considerations are relevant. All projects require the same initial investment, $2,000,000. Moreover, all are believed to
For the first part of this assignment only quantitative considerations are relevant.
All projects require the same initial investment, $2,000,000. Moreover, all are believed to be of the same risk class. The weighted average cost of capital for the first part is 10%. To simulate your analysis, consider the following questions:
- Can you rank the projects simply by inspecting the cash flows?
- What criteria might you use to rank the projects? Which quantitative ranking methods are better? Why?
- What is the ranking you found by using quantitative methods? Does this ranking differ from the ranking obtained by simple inspection of the cash flows?
- What kinds of real investment projects have cash flows similar to those in the exhibit?
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Part II
The company has the following capital structure:
Account
$
Costs before tax
Long-term Debt
2,000,000
10%
Preferred Stock
500,000
14%
Common Stock
2,500,000
16%
1.Calculate the weighted average cost of capital (tax is 36%)
2.Using the same cash flows in exhibit I find the NPV, PI, IRR. Which project(s) would you recommend and why?For the first part of this assignment only quantitative considerations are relevant.
All projects require the same initial investment, $2,000,000. Moreover, all are believed to be of the same risk class. The weighted average cost of capital for the first part is 10%. To simulate your analysis, consider the following questions:
- Can you rank the projects simply by inspecting the cash flows?
- What criteria might you use to rank the projects? Which quantitative ranking methods are better? Why?
- What is the ranking you found by using quantitative methods? Does this ranking differ from the ranking obtained by simple inspection of the cash flows?
- What kinds of real investment projects have cash flows similar to those in the exhibit?
Part II
The company has the following capital structure:
Account
$
Costs before tax
Long-term Debt
2,000,000
10%
Preferred Stock
500,000
14%
Common Stock
2,500,000
16%
1.Calculate the weighted average cost of capital (tax is 36%)
2.Using the same cash flows in exhibit I find the NPV, PI, IRR. Which project(s) would you recommend and why?
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