The reason for not considering the sunk cost in capital budgeting analysis and for considering the opportunity cost and externalities. Introduction: Sunk Cost: The cost that is not based on the acceptance or rejection of a decision is called sunk cost. It is an already incurred cost before taking decision about the project and can’t be adjusted or recovered. Opportunity Cost: The loss of estimated income due to the rejection of a project is known as opportunity cost. It is considered as an important factor for capital budgeting decisions. Externalities: The cost to eliminate the effect of an alternative on other parties that are not involved in the decision making is called externalities cost. It is considered along with other factors, to accept or reject an alternative.

Question

Jeff Krause purchased 1,000 shares of a speculative stock in January for $1.89 per share. Six months later, he sold them for $9.95 per share. He uses an online broker that charges him $10.00 per trade. What was Jeff's annualized HPR on this investment? Jeff's annualized HPR on this investment is %. (Round to the nearest whole percent.)

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Question

Chapter 12, Problem 2Q

Summary Introduction

To explain: The reason for not considering the sunk cost in capital budgeting analysis and for considering the opportunity cost and externalities.

Introduction:

Sunk Cost:

The cost that is not based on the acceptance or rejection of a decision is called sunk cost. It is an already incurred cost before taking decision about the project and can’t be adjusted or recovered.

Opportunity Cost:

The loss of estimated income due to the rejection of a project is known as opportunity cost. It is considered as an important factor for capital budgeting decisions.

Externalities:

The cost to eliminate the effect of an alternative on other parties that are not involved in the decision making is called externalities cost. It is considered along with other factors, to accept or reject an alternative.

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Jeff Krause purchased 1,000 shares of a speculative stock in January for $1.89 per share. Six months later, he sold them for $9.95 per share. He uses an online broker that charges him $10.00 per trade. What was Jeff's annualized HPR on this investment? Jeff's annualized HPR on this investment is %. (Round to the nearest whole percent.)

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Estefan Industies has a new project available that requires an initial investment of sex million. The project will provide unlevered cash flows of $925,000 per year for the next 20 years. The company will finance the project with a debt-value ratio of 35. The company's bonds have a YTM of 5.9 percent. The companies with operations comparable to this project have unlevered betas of 1.09, 1.17, 1.28, and 1.20. The risk-free rate is 3.6 percent, and the market risk premium is 7 percent. The tax rate is 21 percent. What is the NPV of this project?