Assume that you have an after-tax cost of capital of 10 percent. Compute the net present value of...
Question:
Assume that you have an after-tax cost of capital of 10 percent. Compute the net present value of each of the five projects listed in the following table.
| After-Tax Cash Flow, End of Year | ||||
| Project | 0 | 1 | 2 | 3 |
| A | $(10,000) | $4,000 | $4,000 | $4,000 |
| B | $(10,000) | $6,000 | $4,000 | $2,000 |
| C | $(10,000) | $2,000 | $4,000 | $6,000 |
| D | $(10,000) | $12,000 | $0 | $0 |
| E | $(10,000) | $0 | $0 | $12,000 |
Rank the above projects from 1 (best for you) to 5.
Cost of Capital:
The cost of capital is the return required to make the capital budgeting decision. It is the cost of the company's funds, both debt and equity. The projects undertaken can be the construction of a building, purchase of machinery, etc.
Answer and Explanation: 1
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View this answerProject A:
Net Present Value = $4,000 * PVIFA (10%, 3) - $10,000
= $4,000 * 2.48685
= $9947.41 - $10,000
= - 52.59 (Rank 3)
Project B:
| ... |
|---|
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Cost of Capital: Flotation Cost, NPV & Internal Equity
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Chapter 3 / Lesson 18
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Cost of capital describes the required rate of return in order for an investment to be profitable. Explore how the concepts of flotation costs, net present value, and internal equity influence the cost of capital for investments.
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