Question
Mandala Inc. has annual earnings equal to 1,750,000 and has 500,000 shares outstanding. Mandala is evaluating the following mutually exclusive projects, for both of which
Mandala Inc. has annual earnings equal to 1,750,000 and has 500,000 shares outstanding. Mandala is evaluating the following mutually exclusive projects, for both of which the relevant interest rate is 8%: Project 1: invest 60,000 next year and generate earnings that will grow in perpetuity. You know that earnings from the project at t= 3 will be 8,500 and earnings from the project at t=4 will be 8925. Project 2: invest 45,000 two years from now and generate earnings that will grow in perpetuity. You know that earnings from the project will grow by 4% a year, and earnings at t=4=5,616. Which project should the company choose? How does the commitment to undertake it affects the share price of Mandala Inc.?
Mandala Inc. has annual earnings equal to 1,750,000 and has 500,000 shares outstanding. Mandala is evaluating the following mutually exclusive projects, for both of which the relevant interest rate is 8%: Project 1: invest today 60,000 and generate earnings that will grow in perpetuity. You know that earnings from the project at t=1 will be 8,500 and earnings from the project at t=2 will be 8925. Project 2: invest today 45,000 and generate earnings that will grow in perpetuity. You know that earnings from the project will grow by 4% a year, and earnings at t=1=5,616. Which project should the company choose? Why?
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