PS4_10Fall - F301 Financial Management Problem Set 4 Fall...

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0 1 2 3 4 5 (300,000) (10,000) 80,000 120,000 120,000 120,000 F301 Financial Management Problem Set 4 Fall 2010 E ACH QUESTION IS WORTH 3 POINTS . T OTAL POINTS = 36. R EMEMBER TO SHOW YOUR WORK . 1. You need to make a decision on a proposed expansion project with an initial cost of $200,000. You expect the project to produce an initial after-tax cash flow of $21,000 at the end of the first year of operation. You also expect the after-tax cash flows to grow at a constant rate more or less indefinitely. If your cost of capital is 14%, what growth rate must be achieved in order to make the project economically viable? ( Hint : the constant growth model introduced in Chapter 7 may be helpful here.) A firm is considering a proposed investment project which requires an initial investment of $300,000. The forecast cash flows for the five-year project are shown below. The firm uses a discount rate of 12%. Use this information to answer questions What is the project’s undiscounted payback period? If the firm uses the plain, undis counted payback period to evaluate this project, will the project be accepted or rejected? – Find the discount rate at
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