Posted by David on Tuesday, November 18, 2008 at 11:22pm.
evaluates investment opportunities using payback. The finance director who has been with the company since its formation in 1975, has recently heard that this method may not be the best for evaluating long term projects. You have been brought in to advise the company and have ascertained:
Share capital 25p £10m
Dept coupon 6% £50m
Market Price of Shares £2.50
Market Value of debt £90 Corporation tax rate 25%
Treasury bill rate 4%
Return from the market 14%
Company beta 1.4
a). Calculate the company WACC
b). Using the WACC calculated above, assess the following opportunities
Project LT3 YW
Initial Investment £3M £3M
Net cash inflows
Year 1 £600,000 £1m
Year 2 £700,000 £1m
Year 3 £800,000 £2m
Year 4 £900,000 £500,000
Year 5 £900,000
Year 6 £900,000
Year 7 £900,000
Using the WACC calculated to the nearest whole number you are required to calculate for reach project,its:
Net Present Value
Internal Rate of Return
c) Advice the company, with reasons, which project it should choose.
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