A project proposal requiring P840,000 initial investment will result to annual cash return as follow: Year 1 P 55,000 Year 2 P 150,200 Year 3 P 275,000 Year 4 P 350,700 Year 5 P 245,000 Year 6 P 120,400 Required: a. If the current cost of funds is 8% and the decision criteria are the net present value and discounted payback, should the project be accepted? b. The project's payback period and internal rate of return?
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
![**Project Proposal Analysis:**
### Introduction
A project proposal requires an initial investment of P840,000. The proposed project is expected to generate annual cash returns as follows:
- Year 1: P55,000
- Year 2: P150,200
- Year 3: P275,000
- Year 4: P350,700
- Year 5: P245,000
- Year 6: P120,400
### Required Analysis
To determine if this project is worth pursuing, we need to analyze the following aspects:
#### a. Net Present Value (NPV) and Discounted Payback Period
- **Cost of Funds:** 8%
- **Decision Criteria:** Should the project be accepted based on NPV and Discounted Payback Period?
#### b. Additional Financial Metrics
- **Payback Period:** The time it takes for cumulative cash flows to equal the initial investment.
- **Internal Rate of Return (IRR):** The discount rate that makes the NPV of all cash flows from the project equal to zero.
### Steps to Analyze the Project
#### Net Present Value (NPV)
NPV represents the difference between the present value of cash inflows and the initial investment. It can be calculated using the formula:
\[ NPV = \sum \left( \frac{R_t}{(1 + r)^t} \right) - C_0 \]
Where:
- \( R_t \) = Cash inflow at time \( t \)
- \( r \) = Discount rate
- \( t \) = Time period
- \( C_0 \) = Initial investment
#### Discounted Payback Period
The discounted payback period is the time it takes for the sum of the discounted cash flows to equal the initial investment. To calculate it, we discount each cash inflow and then determine how long it takes for the cumulative sum of discounted cash flows to cover the initial investment.
#### Payback Period
The payback period can simply be calculated by adding up the annual cash returns until the total equals the initial investment.
#### Internal Rate of Return (IRR)
IRR is the rate at which the NPV equals zero. It is calculated using iterative methods or financial calculators.
### Decision Criteria
- **NPV:** If NPV > 0, the project is considered financially viable.
- **Discounted Payback Period:** Should be within an acceptable timeframe as per](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3c9502c3-2aef-4bdd-a0f2-ac91bd82d702%2F1cfbfe75-34ff-402d-b158-94a547a0f7aa%2Fak12azd_processed.jpeg&w=3840&q=75)
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