FM11 15 - 11-14 a. Year 0 1 2-20 Plan B ($10,000,000)...

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Unformatted text preview: 11-14 a. Year 0 1 2-20 Plan B ($10,000,000) 1,750,000 1,750,000 Plan A ($10,000,000) 12,000,000 0 Incremental Cash Flow (B - A) $ 0 (10,250,000) 1,750,000 If the firm goes with Plan B, it will forgo $10,250,000 in Year 1, but will receive $1,750,000 per year in Years 2-20. b. If the firm could invest the incremental $10,250,000 at a return of 16.07%, it would receive cash flows of $1,750,000. If we set up an amortization schedule, we would find that payments of $1,750,000 per year for 19 years would amortize a loan of $10,250,000 at 16.0665%. Financial calculator solution: Inputs 19 -10250000 N 1750000 0 PV PMT FV I Output = 16.0665 c. Yes, assuming (1) equal risk among projects, and (2) that the cost of capital is a constant and does not vary with the amount of capital raised. d. See graph. If the cost of capital is less than 16.07%, then Plan B should be accepted; if r > 16.07%, then Plan A is preferred. NPV ( Mi l l i o n s o f Do l l a r s ) 25 B 20 15 Cr o s s o v e r Ra t e = 1 6 . 0 7 % 10 A I R RB = 1 6 . 7 % I R RA = 2 0 % 5 5 10 15 20 25 Co s t o f Ca p i t a l ( %) Answers and Solutions: 11 - 15 ...
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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