Question
Indigo Ltd. is faced with three investment proposals with the following information: --------------------------------------------------------------------------- Project Cost Cash Flow (10 years) Beta A $ 200,000 $ 37,000
Indigo Ltd. is faced with three investment proposals with the following information:
---------------------------------------------------------------------------
Project Cost Cash Flow (10 years) Beta
A $ 200,000 $ 37,000 1.6
B $ 160,000 $ 27,500 1.1
C $ 180,000 $ 27,000 .5
The cash flow is after tax and includes the tax savings on CCA. Indigo has a cost of capital of 10 percent, the market portfolio is expected to earn 11 percent, and the risk-free rate is 3 percent.
a. Which projects would you recommend based on analysis using the firm's cost of capital? Show your analysis.
b. Which projects would you recommend based on the individual risk of each project? Show your analysis.
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Intermediate Accounting
Authors: Donald E. Kieso, Jerry J. Weygandt, And Terry D. Warfield
13th Edition
9780470374948, 470423684, 470374942, 978-0470423684
