Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Please help with all sections A company is considering to expand its portfolio of investments. The manager of the firm has collected the following information
Please help with all sections
A company is considering to expand its portfolio of investments. The manager of the firm has collected the following information on two new investment opportunities. Project 1 It is expected to last four years and has the following annual net cash flows. TO T1 T2 T3 T4 (108,000) 25,000 35,000 42,000 48,000 The project is not expected to have any residual value at the end of the project. Project 2 It is also expected to last four years, but it requires an initial investment of 220,000. It is expected to generate annual net profits of 18,000. The residual value of the project at the end of the project will be equal to 0. Firm's cost of capital is 10%. This firm does not pay any corporation tax and employs a straight-line depreciation method. You are required to: a) Estimate the NPV, IRR and payback period for each of the two investment opportunities. Based on your estimations, suggest which project (s) should be accepted when these two projects are assumed to be mutually exclusive. State all the assumptions made. (100-150 words) (45 marks) b) Explain which project will be selected if firm's cost of capital was 14%. (50-100 words) (10 marks) c) The firm has allocated 400,000 to invest into new projects. In addition to the first two projects it has also assessed the NPV for another three projects with the following data: Project 3 Project 4 Project 5 Initial Investment () (121,000) (155,000) (74,000) Net Present Value () 5,650 4,326 1,505 Assuming that project 1 and project 2 are mutually exclusive (part a), calculate the maximum total NPV for the firm when all five considered projects are: (a) divisible and (b) indivisible. (15 marks) d) Discuss the traditionalists' view on the relevance of capital structure on firm's total market value. (150-200 words) (30 marks)Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started