1. A firm has an opportunity to invest in a project and earn 600,000 next year f
ID: 2796649 • Letter: 1
Question
1. A firm has an opportunity to invest in a project and earn 600,000 next year from it. The future years are expected to see cash flow growing at inflation, which is best predicted at 1.7%, in perpetuity. The project is expected to produce these cash flows in perpetuity. The internal rate of return for the project is 17%. What is the present value of the project?
2. D/E is 3.0
Total Assets are 4 million
Long-term debt is 2 million
Working capital is 200,000
FIND the Current Ratio.
3. Beta is 1.6.
Risk free rate is 1.7%.
Equity risk premium is 6%
Use CAPM and find the cost of equity.
Explanation / Answer
1.
Present value of a growing perpetuity = C1/(R-g)
C1 = Cash flow in year 1
R - Rate of return
g - growth rate
PV = 600000/(0.17 - 0.017) = $3921568.63
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