2. Your firm is considering an expansion of its operations into a nearby geographic area that the firm is currently not serving. This would require an up-front investment (startup cost) of $989,060.00, to be made immediately. Here are the forecasts that were prepared for this project: Year Cash Flow 0 -989,060.00 1 70,120.00 2 74,411.34 3 80,937.22 4 89,896.97 The long-term growth rate for cash flows after year 4 is expected to be 4.73%. The cost of capital appropriate for this project is 12.48%. Prepare a detailed and concrete recommendation, explaining whether the firm should go ahead with this project, and why. Provide all information that your superiors may want to see.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 12P
icon
Related questions
Question

Your firm is considering an expansion of its operations into a nearby geographic area that the firm is currently not serving. This would require an up-front investment (startup cost) of $989,060.00, to be made immediately. Here are the forecasts that were prepared for this project, shown in the image. The long-term growth rate for cash flows after year 4 is expected to be 4.73%. The cost of capital appropriate for this project is 12.48%. What is the NPV, Profitability Index, IRR and payback in this case?

2. Your firm is considering an expansion of its operations into a nearby geographic area that the firm is
currently not serving. This would require an up-front investment (startup cost) of $989,060.00, to be
made immediately. Here are the forecasts that were prepared for this project:
Year
Cash Flow
0
-989,060.00
1
70,120.00
2
74,411.34
3
80,937.22
4
89,896.97
The long-term growth rate for cash flows after year 4 is expected to be 4.73%. The cost of capital
appropriate for this project is 12.48%. Prepare a detailed and concrete recommendation, explaining
whether the firm should go ahead with this project, and why. Provide all information that your
superiors may want to see.
Transcribed Image Text:2. Your firm is considering an expansion of its operations into a nearby geographic area that the firm is currently not serving. This would require an up-front investment (startup cost) of $989,060.00, to be made immediately. Here are the forecasts that were prepared for this project: Year Cash Flow 0 -989,060.00 1 70,120.00 2 74,411.34 3 80,937.22 4 89,896.97 The long-term growth rate for cash flows after year 4 is expected to be 4.73%. The cost of capital appropriate for this project is 12.48%. Prepare a detailed and concrete recommendation, explaining whether the firm should go ahead with this project, and why. Provide all information that your superiors may want to see.
Expert Solution
steps

Step by step

Solved in 2 steps with 5 images

Blurred answer
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Essentials of Business Analytics (MindTap Course …
Essentials of Business Analytics (MindTap Course …
Statistics
ISBN:
9781305627734
Author:
Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning