Rotterdam Corp. (RC) is considering a new two-year project. RC estimates that there is a 25% probability that cash flows in two years will be €250,000, a 30% probability that the cash flows will only be €200,000 and a 45% probability the cash flows will be €350,000. The cost of the project is €220,000. The project’s cost of capital is 15% and the risk-free rate is 5%. What is the NPV of the project if financed with 100% equity? If the €220,000 cost of the project is financed with all equity, then what is the rate of return on the unlevered equity? If the project is financed with 30% debt (at the risk-free rate), what is the expected return on the levered equity?
Rotterdam Corp. (RC) is considering a new two-year project. RC estimates that there is a 25% probability that cash flows in two years will be €250,000, a 30% probability that the cash flows will only be €200,000 and a 45% probability the cash flows will be €350,000. The cost of the project is €220,000. The project’s cost of capital is 15% and the risk-free rate is 5%. What is the NPV of the project if financed with 100% equity? If the €220,000 cost of the project is financed with all equity, then what is the
Net Present Value(NPV) is amongst one of the modern techniques of capital budgeting which considers the time value of money by taking into consideration the present value of cash flows at a specific discount rate. It is calculated using the present values of cash inflows and the present value of cash outflows.
Step by step
Solved in 7 steps with 15 images
