Texas Utensils is considering a new project outside of its current line of busin

Question

Texas Utensils is considering a new project outside of its current line of business. The project would cost $500,000 initially and would generate a revenue of $60,000 next year which would grow at 4% per year indefinitely. Since the project is outside the current line of business, managers at Texas Utensils are finding it difficult to agree on the appropriate risk-adjusted discount rate to use in valuing the project. What is the highest discount rate that could be used for the project before it would appear unprofitable?

PLEASE SHOW ALL WORK AND FORMULAS FOR EACH PART

Explanation / Answer

Highest discount rate:

= Next payment/Project cost+Growth rate

= $60,000/$500,000+4%

= 12%+4%

= 16%

Highest discount rate:

= Next payment/Project cost+Growth rate

= $60,000/$500,000+4%

= 12%+4%

= 16%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.