QUESTION $4$

a$.$ As the finance manager of Silicon Valley Enterprise, you are considering

investing in a project that is estimated to cost GHS $100,000.$ The following

cash flows are expected from the project. The cash flow in year four includes

a residual value of GHS $15000.$ The beta of the project is $1\mathrm{.}5$ and the market

return is estimated at $15\%.$ The risk$-$free rate of return is $8\%.$

i$.$ What is the expected return on this project?

$[4$ marks$]$

ii$.$ Now assume Silicon Valley Enterprise employs both debt and equity in its

capital structure and the percentage of debt out of total capital is $40\%.$ If

the interest rate on a bank loan is $10\%$ and the tax rate is $20\%,$ what is the

after$-$tax cost of debt?

$[4$ marks$]$

iii. Using the expected return computed in $($i$)$ as cost of equity and the after$-$

tax cost of debt computed in $($ii$)$ what will the weighted average cost of

capital $($WACC$)$ be$?$

$[3$ marks$]$

iv$.$ Using the WACC as the appropriate discount rate, what will be the NPV

of the investment?

$[4$ marks$]$

v$.$ Reinvesting at overall cost of capital, what will be the MIRR for the

proposed investment?

$[4$ marks$]$

vi$.$ Whenever there are conflicting conclusions between the NPV and the IRR,

the NPV is always superior. Comment on this assertion.

$[3$ marks$]$

vii. The WACC computed in iii will be used as the effective discount rate if

all cases for Silicon Valley. Comment on this assertion.

$[3$ marks$]$