Question 4 A firm considers a new investment. The cash-flows of This investment, as well as the opportunity costs of capital, are given below: Year 0 1 2 3 4 5-10 -100 50 5 Cash-flows Cost of capital (spot rate) 60 2.5% 50 3% 5 3.7% 2% 4% If the firm invests, it will face some constraints in terms of staff and working hours. To solve these issues, the firm will redeploy some resources from another project. This new organization will decrease the cash-flows of the existing project by 20 in years 1 and 2. a) What is the future value in 2 years time of investing $1 into a project with the same risk as the one described above? (2 points) b) What is the Discounted Payback period for the new project? (4 points) c) What is the NPV of the new project? (4 points) d) Which assumptions do the NPV and IRR rules make about the reinvestment rate? (3 points) The firm is also considering the strategic acquisition of a competitor and hired an investment bank. The cost of the acquisition is 1000. The investment bank forecasts cash flows of 50 in the first two years, and then an indefinite stream of 80 every year. The opportunity cost of capital for this acquisition is 8%. e) Determine whether the firm should pursue this acquisition. (4 points) f) Explain what investment banks do, and how they differ from securities firms. (8 points)