What is the appropriate discount rate for the project

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Reference no: EM132000825

1. You have been hired to perform a feasibility study on a new accounting software that requires an initial investment of $9 million. This project will last 8 years. The company expects a total of $2 million in free cash flow in the first year. After one year the remaining annual free cash flows will be revised either upward to $3 million or downward to $500,000. Each revision has an equal probability of occurring. At that time (i.e. one year from now), the project can be abandoned and sold off for $4.8 million after tax. If the project is not liquidated the cash flow will continue for 7 more years, starting at year 2. The relevant discount rate is 10 percent. What is the NPV of the project?

a. $1638753

b. $2062998

c. $939324

d. $1993003

e. $1155113

2. Bruin Inc. is investing in a new project with similar risk profile as its other projects. Considering that the cost of equity is 13.7%, the cost of debt is 6.5% and the company's tax rate is 37%, what is the appropriate discount rate for the project if the debt/equity ratio is 0.5?

a. 8.8975%

b. 7.2967%

c. 10.1000%

d. 10.4983%

e. 8.9000%

Reference no: EM132000825

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