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Spartan Enterprises has a project for which they forecast the following income statement and balance sheet items using the percent of sales method. Item 1
Spartan Enterprises has a project for which they forecast the following income statement and balance sheet items using the percent of sales method.
Item | 1 | 2 |
Sales | $200,000 | $220,000 |
Costs (40% of sales) | $80,000 | $88,000 |
Depreciation (25% of Prior Net Long Term Assets) | $50,000 | $55,000 |
Interest (5% of Prior Debt) | $4,000 | $4,400 |
Unlevered Net Income (Computed Directly) | $70,000 | $77,000 |
Free Cash Flow (Computed Directly) | $44,000 | $48,400 |
Net Capital Assets (110% of Sales) | $220,000 | $242,000 |
Working Capital (33% of Sales) | $66,000 | $72,600 |
Debt (40% of Assets) | $88,000 | $96,800 |
Marginal tax rate | 35% | 35% |
Spartan expects cost of borrowing using Equity to be 12%. If they are right, what discount rate should Spartan use for the Adjusted Present Value method of evaluating the project?
Group of answer choices
5.98%
8.40%
9.20%
12.00%
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