Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / Assume that you are a new analyst hired to evaluate the capital budgeting projects of the company which is considering investing in two CPEC projects, "Expansion Zone North" and "Expansion Zone East"
Assume that you are a new analyst hired to evaluate the capital budgeting projects of the company which is considering investing in two CPEC projects, "Expansion Zone North" and "Expansion Zone East". The initial cost of each project is Rs. 10,000. Company discount all projects based on WACC. Further, all the projects are equally risky projects and the company uses only debt and common equity for financing these projects. It can borrow unlimited amounts at an interest rate of rd 10% as long as it finances at its target capital structure, which calls for 50% debt and 50% common equity. The dividend for next period is $2.0, its expected that they will grow at the constant growth rate of 8%, and the company's common stock sells for $20. The tax rate is 50%.
The cash flows of both the projects are given in table below:
Time
Expansion Zone North
Cashflows (amount in Rs.)
Expansion Zone East
Cashflows (amount in Rs.)
0
- 10,000
- 10,000
1
6,500
3,500
2
3,000
3,500
3
3,000
3,500
4
1,000
3,500
Carefully analyze the above table and answer the following questions in detail.
I. Calculate the weighted average cost of capital for this firm?
II. Compute each project's IRR, NPV, payback, MIRR, and discounted payback.
III. Which project(s) should be accepted if they are mutually exclusive?
IV. Which project(s) should be accepted if they are independent? Explain
I). weighted average cost of capital for this firm = 11.50%
ll). IRR of Expansion zone North = 18.03%
IRR of Expansion zone East = 14.96%
NPV of Expansion zone North = $1,053.87
NPV of Expansion zone East = $743.65
Payback period of Expansion zone North = 2.17 years
Payback period of Expansion zone East = 2.17 years
MIRR of Expansion zone North = 14.33%
MIRR of Expansion zone East = 13.52%
Discounted payback period of Expansion zone North = 2.81 years
Discounted payback period of Expansion zone East = 3.67 years
lll). If the project are mutually exclusive the project that have higher NPV should be chosen so, the project Expansion Zone North should be accepted because it has higher NPV than the project Expansion Zone East.
lv). If the project are independent the project that have positive NPV should be chosen so both the project should be accepted because they have positive NPV.
