1. Athena Corp. wants to invest $8,000 in a project with estimated cash flows as

Question

1.     Athena Corp. wants to invest $8,000 in a project with estimated cash flows as follows:  Yr 1: $1,250 Yr. 2: $1,700 Yr. 3: $2,157 Yr. 4: $2,734 Yr. 5: $3,107.  At what cost of capital would Athena break even on this project?  What if the project cost was lowered to $7,800?  

2.     If Athena%u2019s cost of capital is 10%, should the project be accepted at a cost of $8,000?  At a cost of $7,800?

Athena Corp. wants to invest $8,000 in a project with estimated cash flows as follows: Yr 1: $1,250 Yr. 2: $1,700 Yr. 3: $2,157 Yr. 4: $2,734 Yr. 5: $3,107. At what cost of capital would Athena break even on this project? What if the project cost was lowered to $7,800? If Athena%u2019s cost of capital is 10%, should the project be accepted at a cost of $8,000? At a cost of $7,800?

Explanation / Answer

Hi,

Please find the answer as follows:

Part 1:

Athena would break even when its NPV = 0

Therefore, Cost of Capital would be = 9.82%

If Project Cost is 7800, Cost of Capital would be = 10.68%

Part 2:

NPV when cost is 8000 = -8000 + 1250/(1+.10)^1 + 1700/(1+.10)^2 + 2157/(1+.10)^3 + 2734/(1+.10)^4 + 3107/(1+.10)^5 = -41.53

No, the project should not be accepted.

NPV when cost is 7800 = -7800+ 1250/(1+.10)^1 + 1700/(1+.10)^2 + 2157/(1+.10)^3 + 2734/(1+.10)^4 + 3107/(1+.10)^5 = 158.47

Yes, the project should be accepted.

Thanks.

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