1. A capital budgeting project is expected to have the following cash flows: Yea

ID: 2719254 • Letter: 1

Question

1. A capital budgeting project is expected to have the following cash flows:

Year Cash Flows

0 -$1,000,000

1 $400,000

2 $400,000

3 $200,000

4 $400,000

What is the project’s internal rate of return?

16.00%

8.99%

21.86%

15.54%

2. A capital budgeting project is expected to have the following cash flows:

Year Cash Flows

0 -$850,000

1 $300,000

2 $400,000

3 $500,000

What is the project’s net present value at an 18% required rate of return?

-$4,173.50

$10,800.96

-$18,725.33

$350,000.00

3.Luther’s Famous Barbeque has estimated the following cost of debt (before-tax) and cost of equity.

Proportion of Debt Before-tax Cost of Debt Cost of Equity

30% 7.0% 11.1%

40% 7.3% 11.9%

50% 8.4% 13.7%

What is the cost of capital at Luther’s optimal capital structure given the above information and a 40% effective tax rate?

8.71%

8.89%

9.03%

9.37%

Explanation / Answer

1)At IRR,

Present Value of Cash Ouflows = Present Value of Cash Inflows

1000,000 = 400,000/(1+IRR) + 400,000/(1+IRR)^2 + + 200,000/(1+IRR)^3+ 400,000/(1+IRR)^4

Computing for IRR, we get

IRR = 15.54% (Option-D)

2)NPV = Present Value of Cash Inflows - Present Value of Cash Ouflows

= [300,000/(1.18) + 400,000/(1.18)^2 + 500,000/(1.18)^3 ] – 850,000

= 845,826.50 – 850,000

= -$4173.50 (Option-A)

Part-3:-