PLEASE ONLY ANSWER THE LAST TWO QUESTIONS 3. Projeet analysis Bancroft Inc. has

Question

PLEASE ONLY ANSWER THE LAST TWO QUESTIONS

3. Projeet analysis Bancroft Inc. has summarized the expected cash flows froma propased praject below Tatal investment outay Operating cash rlaw, OCF Total term nation 8h flow $400,00D $120,000 $120,000 $120,000 $120,000 $55,000 If the project's WACC is 10.5%, what is the project's NPV O $9,450.82 $13,193.42 11,315.27 $15,085.40 $20,845.67 0 The firm used its WACof 10.5% ta evaluate this project because it beeves the project is af average risk. Suppose the project actualy had lower-than-average risk, and the CFO thinks the WACC should be risk-adjusted. What effect wculd this have an the praject's NPV? Increase NPV O Decrease NPV O No effect on NPV Bancroft Inc. is going to use factory space for this project that it usually rents to other firms If this project is accepted, Bancroft wi nct be able to rent the space anymore. If the firm usually generates $10,00D per year in ofter-tax leasing revenue from the foctory spoce,what is the value of the project when you cansider this factor? Assume Bancroft still considers the project to have average risk and uses a WACC of 10.5%. O-$12,856.01 0 -421,540.0D -$18,165.16 0-$23,358.40 O -$14,638.82 uppose Bancroft's management team discases that nearly $400,000 in research and development costs were ncurred before the new project proposal was put together. What effect would this have on the praject's NPV? O Na effect on NPV O Decrease NP Increase NPV

Explanation / Answer

C)

Annual income would decrease by 10000, so it will be 110000 (120000-10000)

= - 400000 + 110000/(1+0.105)^1 + 110000/(1+0.105)^2 + 110000/(1+0.105)^3 + 110000/(1+0.105)^4 + 55000/(1+0.105)^4 = 18,165.16(negative)

D)

The correct answer is Decrease in NPV.

Therefore, the correct opiton is option B.

Year Cash Flow Discount @ 10.5% Present value of cash flows 0 -400000 1 -400000 1 110000 0.904977 99547.51 2 110000 0.818984 90088.25 3 110000 0.741162 81527.82 4 110000 0.670735 73780.84 4 55000 0.670735 36890.42 -18165.2

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