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Question
Time value of money, cost of capital and Capital budgeting decision Year 0 (1000) 1 800 2 600
Q1: The management of LB Co is evaluating an investment in a new coffee roasting machine. The company has taken great care to estimate the future cash flow for the roasted coffee beans that the machine will produce and finally, they manage to present the estimated cash flow for the project in the table below:
Estimated cash flow in million
The company believes that 10% returns is available elsewhere on the capital market for a similar risk project.
Required:
(a) Calculate the net present value and profitability index of the planned investment projects.
(b) Calculate the payback period of the planned investment projects.
(c) Discuss the financial acceptability of the investment projects.
(d) State clearly any limitations and assumptions that you made in your calculations.
What is the cost of equity raised by selling new common stock? (hint: use rs = (D1/P0) X100+(g) or P rs = (D1/P0) X100+(P1-P0)/P0 X100)
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