Question
Goodman Company implemented two projects, QSteamer and DSpray with three years duration. QSteamer with the initial investment of $50,000, with returns $15,000, $19,000 and $23,000
Goodman Company implemented two projects, QSteamer and DSpray with three years duration. QSteamer with the initial investment of $50,000, with returns $15,000, $19,000 and $23,000 in three subsequent years, repectively. However, due to limitation of funding, QSpray gets financing of $70,000 from an investor at the beginning. After a year, it records a $0 return; and $10,000 is returned to the investor. After another year, it generates net profit of $40,000 and $25,000 is returned to the investor. Meanwhile, the investor further invests $10,000 in the company. At the end of the last year, it generates net profit of $55,000 and $80,000 is returned to the investor. The project ends. The interest rate in the market is given as 7%. (a) Calculate the rate of return in percentage for the two projects, if any. (5 marks) (b) Calculate the cost of capital for project QSpray. (4 marks) (c) Judge whether the two projects make profit and determine which one should be preferred. (6 marks)
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