Chapter10Handout

# Chapter10Handout - has been 15 and the risk free rate is...

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Chapter 10/11: Problems 1) A project will cost \$1,000 today and will pay back \$100 one year from today (t=1), \$200 two years from today (t=2), \$500 three years from today (t=3) and \$1,000 four years from today (t=4). If the required rate of return is 7%, answer the following questions: a) What is the NPV of the project? b) What is the IRR of the project? c) What is the payback period of the project? d) What is the profitability index of the project? e) Should the project be accepted?

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2) Whimsical Whiskey Inc. is looking to create a new brand of premium whiskey. To take on the project, there would be an initial cost of \$2,500. The project is anticipated to return \$500 at t=1, \$750 at t=2, \$1,000 at t=3 and \$1,500 at t=4. The company plans on financing this project with 60% equity and 40% debt. Whimsical Whiskey Inc. currently has a 30 year bond with 12 years left until maturity paying a 8% annual coupon at a price of \$950.00. The company’s Beta equals 1.2, the average market return
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Unformatted text preview: has been 15% and the risk free rate is equal to 2%. Whimsical Whiskey has a 30% tax rate. Answer the following questions: a) What is the yield of the company’s bond? b) What is the required rate of return on their equity? c) What is the firm’s WACC (Weighted Average Cost of Capital)? d) What is the NPV of this project? e) What is the project’s IRR? f) Should the project be accepted? 3) You are looking to buy a new AC unit for RCB. You are debating between two different units. The first unit (unit A) has a cost of \$40,000 and will have operating costs of \$8,000 per year. The unit’s life is 5 years. The second unit (unit B) has a cost of \$80,000, but operating costs will be \$4,000 and the unit’s life will be for 8 years. If the required rate of return for RCB is 6%, answer the following questions: a) What is the equivalent annual cost of unit A? b) What is the equivalent annual cost of unit B? c) Which unit should RCB choose?...
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## This note was uploaded on 12/04/2011 for the course FIN 3300 taught by Professor Toddstotnitch during the Fall '11 term at Georgia State.

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Chapter10Handout - has been 15 and the risk free rate is...

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