Frieda Inc. is considering a capital expansion project. The initial investment o
ID: 2702280 • Letter: F
Question
Frieda Inc. is considering a capital expansion project. The initial investment of undertaking this project is $105,500. This expansion project will last for five years. The net operating cash flows from the expansion project at the end of year 1, 2, 3, 4 and 5 are estimated to be $22,500, $25,800, $33,000, $45,936 and $58,500 respectively. Frieda has a capital structure consisting of 20% debt and 80% equity. The after-tax cost of debt is 16% and the cost of equity is 18.5%.
What is Frieda%u2019s weighted average cost of capital?
16%
18%
24%
22%
Continued from Question, based on Frieda%u2019s weighted average cost of capital calculated, what is the NPV of undertaking this expansion project? That is, what is the NPV if the weighted average cost of capital is used as the discount rate?
-$13,882.85
$1,445.94
-$15,183.60
$1,817.34
Based on the NPV obtained in Question 30, shall Frieda undertake the expansion project?
Yes, because NPV>0.
Yes, because NPV<0.
No, because NPV>0.
No, because NPV<0.
Explanation / Answer
1. B. 18%
2. C. -$15,183.60
3. A. Yes, because NPV>0
4 A. 15.20%
5 B. No, IRR < Weighted Average Cost of Capital.
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