Question
I need an explanation for these problems 1 Knowles Music Inc. wants to expand its business and wants to use some debt capital to help
I need an explanation for these problems
1 Knowles Music Inc. wants to expand its business and wants to use some debt capital to help finance that expansion. If it borrows $150,000.00 for 5 years, and the lender says the quarterly payments will be $8,855.74, what is the interest rate for this loan? (Compute to 4 decimal places).
Answer:N = 5 x 4 = 20 PV = 150,000PMT = -8,855.74
Compute I = 1.637499 x 4 = 6.549996%. (how to get these number)
2.Howertons Corp. is considering offering a new product which would cost $2.6 million to develop, and the expected annual Free Cash Flows (in thousands of dollars) are: CF1 = $325; CF2 = $487; CF3 = $576; CF4 = $653; and CF5 = $210. If the companys minimum required annual return is 18%, would this be a good investment?
Answer:NPV: $(1,195.6460) means Cost exceeds GPV
IRR: (4.681239) = (4.68%) which is lower than 18%This is not a good investment because NPV is less than $0(When NPV is less than $0, this means the Upfront Cost exceeds the future expected GPV benefit)
3 How much would the upfront cost need to be in order for the Q2 project be a good investment?
Answer:I = 18 CF0 = 0
CF1 thru CF5 are the same
Compute NPV: $1,404.354 (no more than $1.404 mil.)
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