Investment decisions & Market Efficiency

WeLock Inc. has produced the forecasted income statements below for a new project:

2. (b) Consider the project described in (a). Assume that the firm plans to finance 40% of its net capital expenditure and working capital needs with debt. The interest rate is 10%. Re-estimate the payback period, NPV and IRR to equity investors if the cost of equity is 24%.(30 Marks)

3. (c) Why is straight NPV analysis flawed as compared to models that include option pricing in the NPV analysis? (20 Marks)

(d) Define the three forms of market efficiency. Explain why it is that in an efficient market, investments have an expected NPV of zero (20 Marks)

Year 1 2 3 4 Revenues ($) 15,000 18,000 23,000 27,000 - Cost of goods 5,000 5,400 5,800 6,200 sold ($) - Depreciation 5,500 4,500 3,800 2,900 ($) =EBIT ($) 4,500 8,100 13,400 17,900 The company's tax rate is 25%. The project required an initial investment of $16,000 and an additional investment of $1,500 at the end of year two. The working capital is anticipated to be 12% of revenues, and the working capital investment has to be made at the beginning of each period. Estimate the project's payback period, NPV and IRR to investors in the firm. Assuming the cost of capital is 20%. Recommend if the project should go ahead based on each of the methods. (30 Marks)