Reference no: EM132528647
You are considering a 5-year investment project which is expected to cost $1, 000, 000. In each year, you have decided that there are 3 possible states of the economy: good, average, and poor. In each individual year there is a 35% chance of the economy being good and a 15% chance of it being poor. You forecast the following net cash flows for the project:
(a) What is the expected net cash flow each year?
Hint: Do some research on how to calculate expected cash flow given probabilities in each scenario.
You have arranged the following sources of funding: (i) $200,000 from a 5-year fixed interest loan whose annual loan payments are $48,126.91. (ii) $250,000 from a 5-year zero-coupon bond with a face value of $350,000. (iii) $300,000 from an ordinary share issue where a dividend of $18,000 will be paid in one year and it is expected to grow at 3% per annum. (iv) $250,000 from a 5-year coupon-paying bond issue whose coupon rate is 7% and face value is $250,000.
(b) what is the discount rate given above sources of financing?
Hint: The discount rate should be the weighted average cost of capital.
(c) What is the NPV of this investment project and should you invest in this project?
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