Mala Prohibita Inc. is evaluating a proposal to acquire a new equipment. The equipment wouldrequire an investment of P417,860, including freight and installation cost of P40,000. It expected to have a 10-year life with no scrap value at the end of its life. It has been estimated that the new equipment would increasethe company's cash inflows, net of expenses and income taxes by P68,000. The company can issue its 7%P1,000 par value bond to fund the project. The same type of bond is available in the market at P932.04836 perbond with interest payable semi-annually for ten years. The company is subject to 32% income tax.Determine the Cost of Capital (k)Using NPV and IRR method, give your recommendation if the company should push the project or not. Explain your answer.

Net Present Value: It is a method of capital budgeting used by project managers to measure a…

Answered: Determine the Cost of Capital (k) Using…

Determine the Cost of Capital (k) Using NPV and IRR method, give your recommendation if the company should push the project or not. Explain your answer.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Mala Prohibita Inc. is evaluating a proposal to acquire a new equipment. The equipment would
require an investment of P417,860, including freight and installation cost of P40,000. It expected to have a 10-
year life with no scrap value at the end of its life. It has been estimated that the new equipment would increase
the company's cash inflows, net of expenses and income taxes by P68,000. The company can issue its 7%
P1,000 par value bond to fund the project. The same type of bond is available in the market at P932.04836 per
bond with interest payable semi-annually for ten years. The company is subject to 32% income tax.
Determine the Cost of Capital (k)
Using NPV and IRR method, give your recommendation if the company should push the project or not. Explain your answer.

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explain that when developing a working capital policy, the entrepreneur determines the joint impact of the level of working capital investment and financing on profitability and risk,and Compare the three alternative working capital policies. Which policy would you consider implementing should you want a venture to show a higher expected profitability?
Explain the conditions under which a company’s WACC is appropriate to use as the cost of capital when evaluating the company’s projects.
For a capital investment project to be acceptable, it must generate a rate of return A) Less than the required rate of returnB) Equal to or greater than the cost of capitalC) equal to the initial investmentD) none of the above
The weighted average cost of capital is used to determine whether or not a project should be done. true false
Select all that are true with respect to the NPV rule for making capital investment decisions. Group of answer choices When done correctly, NPV directly measures expected value creation NPV ignores cash flows in the distant future NPV causes decision makers to be myopic For independent projects, all positive NPV projects should be taken, and negative NPV projects should not be taken For mutually exclusive projects, choose the project with the highest NPV
The average accounting rate of return (AAR): Select one: A. is the best method of financially analysing mutually exclusive projects. B. is similar to the return on assets ratio. C. measures net income as a percentage of the sales generated by a project. D. considers the time value of money. E. is the primary methodology used in analyzing independent projects.
Discuss two drawbacks of utilizing the weighted average cost of capital to make investment choices when making capital allocation decisions.
Please describe NPV, IRR and their relationship. How do you evaluate each for making an investment decision? That is, what is a favorable NPV and IRR for making an investment decision. If you were developing a capital budgeting process at your employer, how would you prioritize your projects? What is the NPV when IRR = WACC, IRR>WACC, and IRR<WACC? There is a duplex for sale in Absecon for $700,000 at this time. It has 2 units that generate a total of $25,000 in gross rent. The property taxes are $4,000, commercial property insurance is $2,000, flood insurance is $1,000, and annual maintenance is $2,000. You expect to sell it in one year at a price growth of 0%. What is the NPV with a WACC of 10%. Is the IRR greater or less than the WACC? Would you invest in this project and why?
What are the components of the weighted average cost of capital that a company should use for project valuation?
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